Twitter Inc (NYSE:TWTR) investors have been watching the days leading up to May 5. That’s when the lockup of 489 million shares of the company expires. Many investors may have been exiting the stock because of that lockup expiration. However, management says they have nothing to worry about because they won’t be selling their shares.
Twitter files 8-K
In a filing with the Securities and Exchange Commission today, Twitter Inc (NYSE:TWTR) CEO Dick Costolo said he won’t be selling his shares when the lockup expires next month. Co-founders Evan Williams and Jack Dorsey also said they don’t plan to sell, and neither does Benchmark Capital.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
According to the SEC filing, Twitter Inc (NYSE:TWTR) management must sell shares according to a prearranged trading plan. They must enter into such a plan during an “open trading window” and “have a ‘cooling-off’ period.” This would mean that Dorsey, Williams and Costolo wouldn’t be able to sell until 90 days after their next “open window.”
The filing also states that Benchmark Capital, which is “affiliated” with one of Twitter Inc (NYSE:TWTR)’s board members, doesn’t plan to sell or distribute any of the company’s shares to limited partners either before or right after the lockup expires. Proxy filings indicate that together, Dorsey, Williams, Costolo and Benchmark Capital hold approximately 20%. However, this means that the lockup expiration covers 83% of the company’s basic outstanding shares, or two-thirds of the diluted count, according to The Wall Street Journal.
Twitter management remains confident
The purpose of lockups on stocks is to keep companies’ biggest shareholders from dumping stock in massive quantities right after an initial public offering. The expiration of the lockup means that anyone who owns those shares of Twitter Inc (NYSE:TWTR) will be able to sell them on May 5. While some employees probably will sell, the micro-blogging company’s top management expressed confidence in the company.
Twitter Inc (NYSE:TWTR) also said it will release its first quarter results on April 29—the week before the lockup expires. As TechCrunch notes, this suggests that those results could be positive.
Is Twitter’s lockup already priced in?
The Wall Street Journal notes that shares of Twitter Inc (NYSE:TWTR) have declined by approximately 36% this year to date. As a result, some believe that the expiration of the lockup is already priced in. Miriam Gottfried notes that shares of Facebook Inc (NASDAQ:FB) increased 42% during the month after its largest lockup expiration, which was on Nov. 14, 2012—even though sentiment was bearish ahead of that expiration.
How Facebook’s expiration differs from Twitter’s
She notes that there are some big differences between Facebook Inc (NASDAQ:FB)’s lockup expiration and Twitter Inc (NYSE:TWTR)’s. At the time of Facebook’s, its share price was trading at around half of its price at the initial public offering. Twitter, on the other hand, is trading at more than 50% over its IPO price.
She also notes that at Twitter Inc (NYSE:TWTR)’s IPO, no insiders sold, but many of them sold at Facebook Inc (NASDAQ:FB)’s offering. About 40% of the shares sold at Facebook’s offering were from executives and directors, while an additional 25% came from large shareholders with at least a 5% stake in the social network.
Twitter Inc (NYSE:TWTR) executives may have been looking to relieve some pressure ahead of the lockup expiration. Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg held a significant chunk of his company and said the earliest he would sell any of his shares was September 2013. However, no Twitter directors or executives hold over 10% of the company. In fact, only one shareholder—Rizvi Traverse Management—holds more than 10%, with a 14.4% stake.
Wall Street’s concerned about Twitter
While some see Twitter Inc (NYSE:TWTR)’s plan to release its results before the lockup period expires as a suggestion that the results will be good, others remain bearish on the company. Twitter said the first quarter of the year could mark its first sequential decline in revenues. In addition, investors have become concerned about slowing growth.
And then there’s the matter of valuation. The company trades at almost 24 times its sales estimates for this year. Facebook Inc (NASDAQ:FB), on the other hand, trades at a sales multiple lower than 14.