As Twitter Crashes, Zulily Lockup Expiration Could Send Shares Spiraling Further Down

May. 8.14 | About: Zulily, Inc. (ZU)

Summary

The lockup period for Zulily expires Tuesday, May 13, allowing major pre-IPO shareholders in the mom-oriented retail website to sell their outstanding shares.

This could likely create a supply shock for Zulily, temporarily depressing share price.

Twitter’s decline post-lockup-period could be a further catalyst for shorting Zulily as well.

Over the past five days, Twitter (NYSE:TWTR) has crashed over 26%. This decline is partly attributable to the expiration of Twitter's expiration of its lock up period. See our prior warning on this Twitter event here.

On Tuesday, May 13, the lockup period that began with the November 14, 2013 IPO of Zulily Inc. (NASDAQ:ZU) will come to a close, allowing major pre-IPO shareholders in the mom-oriented retail website to sell their outstanding shares.

The outstanding shares are primarily held by venture capital firms and ZU's executives and directors. The sudden increase in ZU shares available for sale on the market will likely lead to a decline in share prices, potentially generating a short opportunity for aggressive investors.

After pricing above an upwardly revised expected range at $22 per share in its highly successful November IPO, ZU saw an impressive 71.4% first day return. Prices held steady until late February, when ZU spiked as high as $73.50 per share; the stock has since been gradually cooling.

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Share Unlocking
The May 13 lockup expiration will permit pre-IPO shareholders to sell some 110.6 million shares of ZU, nearly ten times the 11.5 million shares offered in the firm's IPO.

The venture capital firms that hold significant portions of ZU will likely wish to sell at least some of their shares in order to raise capital and return funds to their investors, and will be especially eager to do so before share prices can slide any further. These shareholders include Maveron Equity Partners with 24.6 million shares; August Capital with 7.8 million shares; and Andreessen Horowitz with 7.6 million shares.

The executives and directors of ZU will also be free to sell their shares with the conclusion of the quiet period, and will likely take advantage of their first opportunity to sell since the IPO. The executives and directors collectively hold 88.8 million shares of ZU.

Business Summary
Zulily is a retail website, tailored to entice moms, both through its selection and through its shopping experience; the site has been highly successful since its 2010 debut, growing into one of the largest stand-alone e-commerce companies in the US.

A new selection of approximately 4500 product styles appears on the site each day through flash sales events-curated, time-limited sales from brands of every size. This sales model allows vendors to access a large, specifically targeted audience without investing the marketing resources that might otherwise be required to do so.

Zulily does not maintain a large inventory, and essentially functions as a middleman between customers and vendors. The firm has continued to see high growth in its user base, with a 98.5% increase in active users (defined as customers who had made a purchase at least once in the past year) from September 30, 2012 to September 29, 2013.

Competition
Zulily must compete with similar online retailers and the websites of traditional retailers for consumer attention and business; many of these competitors have access to greater financial resources and user bases than ZU. Major competitors include eBay (NASDAQ:EBAY), Amazon (NASDAQ:AMZN), Half.com, Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and others.

Conclusion For ZU Investors

News of a disastrous day for Twitter, Inc. in the aftermath of its own May 6 lockup period expiration seems to have caught ZU investors' attention, pushing the ZU price into a tailspin yesterday.

The expiration of the lockup period on May 13 could send share prices down even further, an additional catalyst for shorting ZU.

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Disclosure: I am short ZU. 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.