By Drew Singer and Esha Dey
November 9, 2019, 7:00 AM EST
For newly a public company, two rites of passage loom: its first few earnings reports, and the expiration of its IPO lockup. Twice this month, those events conspired to unleash double-doses of pain for investors.
Uber Technologies Inc. plunged 13% over two days after reporting third-quarter results and early investors unleashed millions of shares into the market. A week earlier, Beyond Meat Inc. had one of its worst sessions as a public company. Its shares tumbled 22% after reporting its third-quarter results the night before its IPO lockup period expired — marking the end of selling restrictions for insiders and other pre-IPO investors.
Although stocks are typically prone to move a few percentage points — sometimes even rising — when their lockup period expires, any lockup-related selling outside of expectations can lead to abnormal moves in a recent IPO. When earnings reports are added to the mix, traders and investors alike can be taken on quite the ride.
“The market is left guessing who is going to sell and who is not going to sell,” said Rahul Bhatia, an instructor at Training The Street and a portfolio manager. “That uncertainty is something that markets generally don’t appreciate.”
When Uber’s lockup period expired, multiple block trades ranging from a few hundred shares to several million helped large holders unload their positions, according to an ECM banker involved in the activity who asked to remain anonymous because he isn’t allowed to publicly discuss the transactions. Uber shares fell as much as 8.7% on Wednesday, but closed down 3.9%.
There was less activity than expected, according to the banker, in part due to price. There was a long list of holders who could potentially sell. But some traders likely wanted to avoid selling at the lows, he said.
Just a fraction of the shares that were subject to the selling restriction traded on the day. Some of that activity was also attributed to the same shares changing hands multiple times, University of Florida professor Jay Ritter said in an interview.
“Because the lockup date is known in advance, buyers are waiting for the opportunity to buy at a discount,” he said. “Some mutual funds wait until the lockup expiration before buying. Some hedge funds short the stock and then cover their position as soon as the lockup expires.”
That is borne out by the data. According to financial data analytics firm S3 Partners, there was increased short activity immediately ahead of Uber’s lockup expiry, as well as a slew of long investors selling.
“The post lockup long selling will probably take several days to complete as the newly freed longs will try not to move the market severely as they exit their positions,” S3’s head of research Ihor Dusaniwsky said.
Rival ride-hailing firm Lyft took unusual measures to avoid a situation in which its lockup expired close to earnings. The company moved the end of its IPO lockup period to Aug. 19 from Sept. 25, saying the expiration would have fallen within the company’s earnings-related quiet period.
“If you are a trader, you can try to take advantage of the price drop, but the drop is [typically] small and short-selling costs tend to be large,” New York University professor Aswath Damodaran said in an interview.
Investors will get another opportunity to experience these public rituals in real-time next week, when lockups expire and earnings hit in short succession for the “Starbucks of China,” Luckin Coffee Inc., which is up 9% since its IPO. Life science equipment supplier Avantor Inc. and infrastructure software maker Fastly Inc. also have lockup expirations on Wednesday. Avantor reported third-quarter results on Tuesday while Fastly reported its results on Thursday.