Snap's day of reckoning is here (SNAP)

pulse

July 31, 2017 1:56 PM

The first phase of Snap's post-IPO lock-up expired over the weekend, making 400 million shares owned by early investors eligible for open-market trading.

It could be a rough couple of weeks for Evan Spiegel and Snap, depending on whether early investors dump their shares following the share lock-up expiration.

Snap's day of reckoning is here, and it could mean another rough patch for the company's stock.

The first phase of Snap's post-initial-public-offering lock-up expired over the weekend, making 400 million shares owned by early investors eligible for open-market trading on Monday.

The stock was down as much as 5.1% to start the day before recovering slightly to trade 0.2% lower at 3:03 p.m. ET.

The influx of new tradable shares could spell further weakness for Snap, which had already lost 19% through Friday since pricing its IPO on March 1. The company has emerged as a favorite target for short sellers who don't view the company as worthy of the $20 billion valuation it initially received.

In fact, Snap was such a popular target for bearish bets that the cost of shorts skyrocketed, with borrowing fees of 50% to 60% making the trade prohibitively expensive to most investors. But the new glut of shares available to be sold short will shrink that cost to about 5%, according to data compiled by the financial analytics firm S3 Partners.

That means it could once again be open season on Snap's shares as the company attempts to combat competition from the likes of Facebook and Instagram.

And while roughly 800 million additional shares are set to hit the market by late August, those will be units owned by employees, directors, founders, and insiders — people who may be less inclined to sell right away.

In other words, if there's going to be an uptick in shorting activity, it's likely to come early this week, depending on how many shares early investors release into the wild.

But not everyone is quite so bearish on the prospect of more Snap shares hitting the market. In a mid-July client note, Barclays highlighted the post-lock-up period as an ideal time to buy, once shares bottom out.

"The negativity in the past few months around SNAP ahead of its lock up expiration is creating an opportunity in our view," Barclays wrote in a recent note to clients. "We would wait until the heavy lock up volume subsides to add to positions, likely sometime mid 3Q."

Snap hasn't been taking any chances in preparing for the August 14 lock-up expiration for employee shares. In the run-up to its IPO, the company held multiple seminars for workers, covering the basics of what it means to be a public stockholder, like not revealing insider information or shorting stocks, according to people familiar with the matter. Professors from Stanford University were also enlisted to coach the company's soon-to-be millionaires on how to manage their wealth.

Ahead of the coming second-round expiration, Snap CEO Evan Spiegel has stressed to employees that they shouldn't worry about the company's stock price — instead encouraging them to focus on creating innovative products.

The process is sure to test some patience along the way. And the ultimate question will continue to linger: Should they cut and run now, or stick to their reclusive founder's vision?

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