Expiration of share lock-ups come back to haunt IPOs
Beyond Meat Inc.’s stock shed more than 20 per cent of its value on Tuesday when the meat-alternatives company became the latest in a series of 2019 IPOs to experience a deep sell-off after the expiration of a share lock-up.
Returns for the 2019 IPO market continue to suggest that investors are now exhausted by the number of so-called “unicorns” that hit the market this year to widespread fanfare. Companies such as Beyond Meat, Zoom Video Communications Inc. and Crowdstrike Holdings Inc. raced out to strong starts and easily doubled their IPO prices before falling back to Earth. Others such as Lyft Inc., Uber Inc. and SmileDirectClub Inc. stumbled out the gate.
Regardless of how investors greeted them upon their arrival, the expiration of the share lockup period — during which certain insiders and early investors are prohibited from selling shares following the IPO — has been an unusually severe momentum-draining obstacle for many of the companies.
After declining for weeks leading up to its lock-up expiration, Zoom Video has lost an additional seven per cent in the two weeks since, while Lyft has lost nearly 25 per cent since Aug. 14, when it surprised investors by announcing it had moved up its lock-up expiration date to Aug. 19 — one month earlier than expected.
Despite announcing that it had posted its first quarterly profit — beating analyst expectations
— and that it was raising its revenue outlook when it posted its third-quarter earnings Monday, Beyond Meat wasn’t able to avoid the same downward pressure when its share lock-up expired Tuesday. The El Segundo, Calif.-based company has now lost 65 per cent of its share value since reaching its high of US$239 in July.
“With all of these companies, the issue is about valuation,” said Jay Ritter, a professor at the University of Florida who researches IPOs. “It was really difficult for me to justify (Beyond Meat’s) valuation at the peak given other long-established food companies were also developing meat substitutes.”
Companies such as Beyond Meat, Zoom Video and Crowdstrike all IPO’d with tight floats, meaning that only a small percentage of each of their shares were placed on the market and that upward momentum, in part, could be attributed to high demand for low supply.
When lock-up periods expire and the remaining shares hit the market, the momentum reverses. The flood of supply begins to outweigh the demand and puts downward pressure on share prices.
According to Ritter, there has historically been a predictable drop associated with lock-up periods expiring. In the 1990s, IPOs that were not backed by venture capital declined an average of one per cent while those that did have VC ownership declined an average of three per cent. Between 2001 and 2011, those numbers decreased to average drops of zero and two per cent, respectively.