Snap Inc (NYSE:SNAP), the parent of photo-based social network Snapchat, opened its publicly traded life more than 40% higher last Thursday, and SNAP stock gained another 10%-plus on Friday. That’s easy money for pre-IPO investors, who celebrated a big day.
But Monday saw a 12% dip, and it looks like Tuesday is going to show some weakness in Snapchat stock as well.
A few trading sessions are just the blink of an eye, relatively speaking. But what we’ve seen so far might be a foreshadowing of stormy seas ahead.
If you’re thinking about buying SNAP stock, now might be the worst possible time.
History Is Not on the Side of SNAP Stock
The Snapchat IPO has been one of the biggest and most highly anticipated tech IPOs in years. Wall Street was certainly whipped into a frenzy. But traders looking to get a stake in Snap Inc have plenty of tech IPO history to consider.
The SNAP media circus was nothing compared to the excitement surrounding the Facebook Inc (NASDAQ: FB) IPO back in 2012. The $3.4 billion Snapchat IPO also paled in comparison to the size of the massive $25 billion Alibaba Group Holding Ltd (NYSE: BABA) offering in 2014.
Both BABA stock and FB stock closed higher on day one, albeit Facebookc’s gain was negligible. However, within months, both stocks had entered a nosedive. Six months after their first day of trading, Facebook was down 38.4%, and Alibaba was off 12.8%.
Both of these companies are solid companies with strong growth numbers. But their post-IPO weakness wasn’t surprising — Reuters reports that eight of the 10 largest tech IPOs in history delivered negative returns of between -25% and -71% in the year following their first day of trading.
Beware the Lock-Up!
One of the major reasons why these IPOs typically perform so poorly in their fort year of trading is because of the so-called “lock-up expiration.”
When a company goes public, the last thing the it wants is for insiders to immediately cash out by dumping millions of shares into the market. To prevent that dump, shares owned by insiders and majority shareholders are typically restricted for a set amount of time. Once a stock has three to six months of public trading under its belt, insiders are free to sell their shares.
Most insiders don’t ditch their shares at the first opportunity. But Silicon Valley companies like Snap Inc have relatively young insiders and investors. People in their 20s or 30s may find it impossible to resist the temptation to become instant millionaires.