Shorting Opportunity For Aggressive Investors
On February 15, 9,867,228 shares of TWTR, mostly held by Twitter employees, will be unlocked for sale. As per the firm's S-1 filing, these employees do not include executives, whose shares will become unlocked along with all other remaining locked shares on May 6, 181 days after the IPO. The second unlocking will apply to a total of 464,829,588 shares.
Each of these lockup expirations may lead to a temporary decline in the price of TWTR shares as a result of the sudden increase in the supply of shares available for sale, potentially resulting in a shorting opportunity for aggressive investors.
February 15 Lockup Expiration
Twitter offered 70 million shares through its IPO. These remain the only shares that can currently be sold on the public markets. The 9.9 million shares to be unlocked on February 15 represent approximately a 14% increase in shares available for sale-a meaningful increase, but nothing compared to the tidal swell of TWTR shares, which could be unlocked May 6--yet still enough to cause some supply shock and likely lower the price of shares.
Many Twitter employees, who currently hold the 9.9 million shares to be unlocked on February 15, could have good reason to sell some or all of their TWTR stakes. February 15 will be the first opportunity that these employees have to cash in on their holdings since the IPO; those who need to pay mortgages, reduce school loans or to buy a red Ferrari may find the opportunity to sell enticing.
Investment-savvy Twitter employees (or those who employ investment-savvy financial planners) may sell in order to avoid the now-notorious volatility of the stock, which has bounced manically between $55 and nearly $75, per share, over the course of the past month. Some may also sell in the interest of evading the pricing uncertainty, which could accompany the much larger second lockup expiration on May 6.
May 6 Lockup Expiration
The approximately 465 million shares that will be unlocked for sale on May 6 will represent a massive increase of over 550% in shares available for sale, creating a strong likelihood that the price of TWTR shares will drop as a result of the increase in supply. Some 124.5 million of these shares are held by the Twitter's executive officers and directors, some of whom may be inclined to sell for the same reasons as their employees.
Venture capital and asset management firms also hold many of these shares: Rizvi Traverse holds over 85 million shares, J.P. Morgan holds 48.8 million shares, and Spark Capital holds 32.4 million shares. These firms are only the tip of the iceberg. Lingering concerns about TWTR's value and volatility may lead these companies to sell some of their shares in 2014.
Twitter is a social networking site, famous for its minimalistic posting requirements. The site limits posts to no more than 140 characters-ostensibly in the interest of preventing the clutter that consumes many social networks. Twitter's massive user base, which includes 100 million daily active users, along with 230 million monthly active users, tweet approximately 500 million times per day. Alongside Facebook (NASDAQ:FB), Twitter has asserted itself as a critical component of an up-to-date social networking presence for individuals and organizations; users range from Justin Bieber to the New York Yankees to the White House.
Twitter can scarcely avoid drawing comparisons to Facebook, which has quickly come to be held up as a prime example of a mishandled IPO; yet important differences between the two should be kept in mind. Twitter remains well above its IPO price and is perceived by many analysts to be overvalued, whereas Facebook's post-IPO plunge in price left it an undervalued stock with significant upside. See our prior published article on Twitter here and here.
Other Risk Factors For Investors Who Own Twitter
As noted above, the price of TWTR shares has been anything but stable. Though TWTR shares certainly have risen since their $26.00 per share IPO pricing, they have yet to find equilibrium, and seem unlikely to do so until the after the May 6 lockup expiration-or beyond.
Unanswered questions about the company's value are also a concern. According to the firm's S-1 balance sheets, Twitter lost over $113 million in the nine months ended September 30, 2013. Though some characterize the Twitter's losses as growing pains (revenue did increase approximately 106% from the nine months ended September 30, 2012 to the same period the following year) the firm has yet to provide satisfying answers as to how it will turn a profit.
Twitter competes for users and page views with other social networking websites, many of which are similar to Twitter in form and function or have added features to mimic Twitter's site. Significant competitors include Facebook, LinkedIn (NYSE:LNKD), Yahoo! (NASDAQ:YHOO), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT). Twitter must also compete with Asian-based firms such as LINE, Sina Weibo (NASDAQ:SINA), and Kakao. Some of these competitors have greater financial resources and/or larger user bases than Twitter.
Disclosure: I am short TWTR, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.