Despite a known problem when the company went public, Square (NYSE:SQ) was hit rather substantially by the lockup expiration that expired on May 16. If it wasn't for the shares coming onto the market that swamps the existing float, one has to wonder if the stock would have even traded down after Q1 results.
At around $9, the stock trades near the post-IPO lows. Square spent most of April trying to hit new highs at $16 so the recent declines are a big hit to the stock.
My post-earnings article hinted at this probable selloff providing an opportunity to buy Square below $10 as an opportunity. Any reason to abandon that recommendation now?
With any stock, many moving parts make the analysis very difficult in deriving the reasoning for stock moves. One prime way to review why a stock moved up or down after earnings is to see where analysts moved forward estimates after the results. Whether right or wrong, a big swing in EPS expectations usually dictates stock price moves.
In the case of Square, analysts are actually forecasting a smaller loss for 2016 and a small profit for 2017. Both numbers are improvements over the expectations prior to the release of Q1 earnings.
Source: Yahoo Finance
Despite some general misconceptions about the quality of the Q1 numbers, the mobile payments processor actually delivered a solid quarter. The analyst estimates confirm that the decline since the Q1 release is all noise related to misunderstanding Q1 numbers or the IPO lockup expiration.
Lockup Expiration Details
The interesting part is that the lockup expiration appears to have a lot of noise and not much substance as well. At the time of the IPO, Square listed the following shares outstanding in the S-1.
Regardless of the lockup expiration confusion, Square listed up to 440 million shares outstanding at the time of the IPO over 180 days ago. The lockup expiration makes it possible for more shareholders to unload shares, but most investors aren't going to find $9 per share appealing.
The key is that Square mentioned 64 million stock options in the Q1 shareholders letter as exercisable as of the expiration date, but the reality is that over 300 million Class B shares become eligible for shareholders to unload. Most of those shares belong to executives, but about 47 million shares belong to VC firms that might dump the shares in the next year.
The key to the stock options though is that the average exercise price is listed at $6.99 in the annual report. Owners of these stock options have limited reasons to exercise these options with the stock price near the exercise price. Not to mention, Square will collect nearly $7 for each option exercised providing more cash to run the company. The reason the company lists only 64 million options as exercisable is that over 35 million options at year-end have an average exercise price of $12.57.
The reality is that only 5.5 million options were exercised last year while 9.8 million options were forfeited or canceled. In addition, the low stock price might cause some shares to not execute. Square listed nearly 10 million warrants with an exercise price of $10.92 that clearly won't occur at the current stock price.
The key investor takeaway is that the recent drop in Square is related to irrational fear related to the known lockup expiration. Investors should use this opportunity to own the premium mobile payments solution provider below $10.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SQ over the next 72 hours.
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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.