It’s here — the Twitter Inc. (NYSE: TWTR) IPO lockup expiration has arrived. Many shareholders are now free to sell. And sell they will do. What investors have to understand is that, despite this event having been known for months, many Twitter investors own this at a tiny cost basis and this is finally their time to be able to lock in those gains.
The first block of stock released was in February and was about 9.87 million shares. This had no real impact on the share count — not like this lockup expiration. Those shares did not belong to the company’s executives and represented a small portion of the nearly 570 million shares outstanding at the end of December. At issue now is that more than 400 million shares are freed up to be sold.
Twitter’s CEO Dick Costolo was fast to say that he and other key executives are not selling shares. He also pointed out that no secondary offering is being filed. This sounds great on the surface, but what this translates to is a long dribble out of stock rather than a one-and-done stock sale.
Going into the lockup expiration, Twitter shares were down close to 15% from their post-IPO opening price, and the stock was at one point up nearly 200% from its IPO price. So, the reaction of a 9.5% drop to $35.03 seems harsh when you consider that this drop takes the stock to an all-time low ($34.57 intraday) versus a high of $74.73.
Twitter shares had lost about 10% last week, likely due to a slower subscriber metric rather than the lockup expiration. Still, this lockup expiration is what matters. We did telegraph more pain ahead for Twitter shareholders rather than salvation.
What stands out is that Twitter’s market cap is still almost $20 billion, and that is after hitting a new low. It is also still worth about 16 times expected 2014 sales and closer to 10 times 2015 sales. On expected earnings, Twitter trades at more than 1,000 times expected 2014 earnings and only 165 times expected 2015 earnings per share.
The trading volume of 52 million shares in the first 90 minutes of trading puts a bit of a hole in the argument that Twitter shares will not be sold en masse, but the reality is that many of these shares will be sold in the weeks, months and years ahead. The company also has already filed to register more than 200 million shares to use in its equity compensation program.
The end game is that Twitter has more than just a lockup expiration to worry about. This entire notion of demonetizing content is a serious issue, because it could seriously change how Twitter users behave and how it gets paid in the future.
Twitter shares were above $39 on Monday, yet the drop in late morning trading on Tuesday was another 10% to $34.60. The volume was already four times a normal trading day and was already the most since early February. The new post-IPO range is $34.29 to $74.73.