Snap Inc. SNAP, the parent company of picture messaging app Snapchat, was known to be the most exciting IPO of 2017. Since last October, when chat of a Snap IPO began, Wall Street created incredible buzz in anticipation of one of the largest tech IPOs in history.
Co-founders Evan Spiegel and Bobby Murphy have grown Snap to be the social media giant it is today. When boldly declining buy-out offers from Facebook FB and Google GOOGL, Mr. Spiegel and Mr. Murphy knew they could grow their company to be worth a lot more than they were being offered. So they worked to expand and Snap now trades on the New York Stock Exchange at a $25 billion valuation.
You might be thinking $25 billion is a tremendous value. Well, insiders of Snap might be cashing in more than you think.
When digging into Snap’s stock issuance, it seems that the affair has the ultimate and underlying value of making their insiders rich. Due to a deviance from a primary focus on shareholders, I call Snap’s stock a gimmick.
Peculiar Lock-Up Periods & Insider Selling
Let’s begin with the curious contingencies in Snap’s lock-up periods: lock-up periods restrict shareholders from selling their positions for a certain amount of time. This allows newly public companies to manage volatility in their first days of trading. With a lock-up period, shareholders are forced to contemplate if they would like to hold their shares or cash in.
Also, lock-up periods create a sentiment of confidence to the market. Large investors holding shares of a new publicly traded company shows the broader market that there is reason to buy and keep the stock.
So, why are Snap’s lock-up periods peculiar? Snap has expected some institutional investors to hold shares for an entire year. While lock-up periods are common, a year is quite the demand to fill. Snap has also reduced the lock-up period for its employees from the usual 180 days to 150 days.
So what’s happening here? Snap increased the amount of time institutions have to hold their stock and decreased the amount of time until their internal employees, the ones who know the company the best, can sell.
But wait, it gets even more outlandish. Within days of Snap stock trading, upper management of Snap began releasing their shares to the open market. Mr. Spiegel and Mr. Murphy both sold 16 million of their shares for $17 apiece, cashing in for over a quarter billion dollars, each. On top of that, additional directors and officers of Snap sold millions of their shares to make an immediate profit off the market’s sentiment of their company.
If Snap really was doing incredibly well and has the potential that the market thinks, why wouldn’t Snap’s most influential faces hold the stock? Why wouldn’t they show the market how confident they are in their company? Is the market more bullish than Snap’s insiders?
Zero Shareholder Say
No one in this world knows Snap better than the people who decided to immediately sell shares, and this should really open your eyes. What’s happening is Snap’s insiders are taking advantage of what the market has to say about them. After a dry year of IPOs in 2016, Snap was the next big thing after Alibaba BABA and Facebook. With that, insiders chose to exploit the opportunity and run to the bank.
But let’s try and look on the bright side. As insiders sell shares, they’re giving away ownership of the company, right? This makes their votes have less weight when deciding on corporate activity? Wrong. Class A shareholders get absolutely zero votes. So not only are Snap’s insiders able to take advantage, they are able to take advantage and not lose any control of the company.
How is Snap able to get away with this? Let’s put our feet in their shoes.
You’re an insider and just sold a heavy portion of shares within days of trading, to buy yourself another vacation home. How do you keep your company’s stock from tanking? Require large investors to hold it for longer, as discussed above. Also, work with the underwriting banks that took you public to issue great ratings for your stock.
Biased Snap Ratings
Yesterday, banks which took Snap public, such as Goldman Sachs GM and Morgan Stanley MS, released their ratings for the company as their waiting periods to release research ended. And what do you know? Most released a “Buy” or “Hold” recommendation.
Although the first “Buy” ratings came before Snap’s underwriters released their research, the majority sentiment leaned towards the sell side on Wall Street. After the release of Snap’s underwriters’ recommendations, the majority of analysts have now swung to the buy side.
Again, let’s take a step back to see what’s happening here. The banks which took Snap public are issuing great ratings, which is an entire step away from the what most of Wall Street felt prior to their release.
Did these brokerages really have any other choice? If they mostly issued “Sell” ratings, as the majority of Wall Street had, then the stock would immediately sell off and that would hurt their firm. And to kill two birds with one stone, issuing bullish ratings keeps the stock lifted as Snap’s insiders sell.
Snap’s stock issuance is rich in confusion. Activity seems to be backwards from what a traditional company would do to keep their shareholders in mind.
When looking under the hood it seems Snap is overvalued in the market. Also, outlook seems shaky as Snap’s professionals can’t even hold their shares.
I realize my above ideas may sound conspiracy like, but those were not my intentions. I hope to spark your ideas and thoughts in what may be happening behind the scenes of Wall Street, concerning Snap’s stock. Regardless, it’s a matter of time until we see Snap’s true intentions of going public rise to the surface.
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