Whenever a company goes public, insiders are restricted from selling their shares during a lock-up period that usually lasts 90 to 180 days. This period prevents insiders, who received the stock for much less than the IPO price, from flipping their shares for a quick profit.
Investors in newly traded companies should keep a close eye on lock-up expiration dates, since a flood of new shares could be sold -- especially if the stock has made a big move since its IPO. One company that recently crossed that date is Twilio (NYSE:TWLO), the cloud platform provider that took investors on a roller-coaster ride last year.
Twilio went public last June at $15 per share, and its stock skyrocketed to nearly $70 per share in late September before plunging back to the low $30s. Two key factors triggered that sell-off -- a secondary offering of 7 million shares and its sky-high valuations. Because of all that volatility, Twilio's lock-up expiration dates were closely watched as make-or-break moments for the stock.
A closer look at Twilio's lock-up expirations
When Twilio went public, its insiders held 67 million locked shares. Thirty-one million of those shares were unlocked on Dec. 20, and the subsequent sell-off caused the stock to fall more than 20% to the mid-$20s over the following two weeks.
Thirty-six million more shares were unlocked on Jan. 19, but only 5 million shares were eligible for trading because of a blackout period before its earnings release on Feb. 7. On Feb. 10, the remaining 31 million shares finally became eligible for trading.
Twilio dipped almost 3% on higher-than-average volume after the shares were unlocked, but the stock erased that loss in just a few days. That recovery indicates that insiders aren't that eager to sell anymore, and that the stock's upside potential could now outweigh its downside potential.
Why IPO lock-up expirations matter
While it's hardly an exact science, a stock's direction following its lock-up expiration dates can tell us a lot about insider sentiment and the possible future of the company.
For example, social-networking giant Twitter (NYSE:TWTR) went public in November 2013 at $26 per share. Its lock-up period expired the following May, and shares crashed 18% on record volume to an all-time low (at the time). Twitter now trades nearly 40% below its IPO price, because of its streak of sluggish sales growth, weak active user growth, and lack of GAAP profitability.
Fitness-tracker maker Fitbit (NYSE:FIT) went public at $20 per share in June 2015. When its lock-up period ended the following February, the stock dropped 8% in a single day. Fitbit's fortunes dimmed the following year because of slowing sales, contracting margins, and more competitors in the market. Today, Fitbit trades at less than $6 per share.
Why didn't more insiders cash out?
Twilio's soft landing following its lock-up expiration indicates that insiders and investors were probably impressed by the company's solid fourth-quarter earnings report.
During the quarter, its revenue rose 60% annually to $82 million, beating estimates by $8 million, and its active customer accounts rose 44% annually to 36,606. On the bottom line, it broke even on a non-GAAP basis -- compared with a net loss of $0.07 in the prior-year quarter. Its net loss also narrowed from $0.48 to $0.15 per share.
Those solid numbers indicate that demand for Twilio's cloud services, which integrate voice calls, SMS messages, video, and other features into apps, is surging. In the past, developers built these features from scratch, which was buggy, costly, and time-consuming. But with Twilio, developers can simply integrate those features over the cloud -- which is easier, cheaper, and more scalable.
One less thing to worry about
Twilio's final lock-up expiration gives investors one less thing to worry about, but they shouldn't neglect its other issues. The stock remains pricey at 10 times sales, which is double the industry average P/S of 5 for software companies.
Twilio also expects its bottom line to stay deep in the red this year because of higher investments in new technologies, and it remains heavily dependent on a handful of top customers, such as WhatsApp. Therefore, investors should keep a close eye on these headwinds to see where the stock is headed this year.