Back in 2000, as the tech bubble was popping, I made a fortune by shorting recent IPOs right as previously restricted shares were unlocked for sale. These companies came public with only a small percentage of the stock sold in the initial IPO in order to create scarcity and an overvalued stock price. 6 months later, a waterfall of stock would hit the market as the rest of the outstanding shares became free trading.
The restricted shares were coming from VC funds and insiders and these individuals often had cost basis measured in pennies or a tiny fraction of the current share price—meanwhile, the insiders knew deep down, that the companies were obscenely overvalued. Therefore, at their first opportunity to sell, they all hit the bid—often with reckless abandon as they were trying to beat all the other sellers out the door.
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The result was that over a few weeks period, the share price would collapse. I previously wrote about how this worked at Twitter. The difference was that, at the time, the bubble in all things social media was alive and well—so Twitter shares bounced back after a proper drubbing during the unlock. I believe that the FANG bubble is now in the process of popping. This means that buyers are no longer willing to prop up silly valuations, which will create incredible opportunities as this decade’s unicorns come public and then experience unlocks—much like in the aftermath of the 2000 bubble.
Snap Inc. (SNAP – USA) is the next of these unicorns to unlock. It is also one of the most ridiculously overvalued stocks in the market today. Despite a market cap of $25 billion, it consistently loses more money each quarter. Even the most bullish analysts—the ones who dumped this IPO on the public—do not expect profits until at least 2021. They meanwhile expect losses of approximately $1 billion during the next two years, before these losses slow. This is scary as cash is rapidly dwindling due to ongoing losses and acquisitions—they’re going to need to raise additional capital soon. Even worse, growth appears to be slowing as other social sites introduce competing products. It’s one thing if you’re burning money to rapidly grow your business—it’s a very different thing if you’re having a bonfire and not even growing fast any longer.
In any case, the only reason the share price is where it is, is the fact that the free trading float is currently restricted. That will all change starting on July 29th when the first of 3 unlocks begins and over 1 billion shares become free trading. I suspect that these will be dumped on the market as rapidly as possible, in order to exit positions before next quarter’s bloodbath of earnings.
I do not short stocks any longer, but I occasionally buy puts when it appears like there’s a great setup. This is a crowded trade, but I’m not sure if it matters. I’m long SNAP puts with enough duration to see this waterfall of stock hit the tape. I wouldn’t be surprised if the shares trade for the mid-single digits by year-end.
Disclosure: Long SNAP puts (various strikes)