Snap shares fell 4% and closed at a record low on Tuesday at $13.10, but it wasn’t just because of the dreaded lockup expiration, which allowed some insiders to finally sell shares.
Snap faced another devastating blow when it was revealed that the company won’t make it into the S&P 500, a popular stock market index. The way Snap has divided up its classes of stock have made it ineligible under the new rules, which state “the S&P Composite 1500 and its component indices will no longer add companies with multiple share class structures.” It’s also ineligible for the FTSE Russell, a major British index because Snap’s public investors don’t have voting rights.
This is bad news for Snap because a lot of people are investing in overall indices instead of individual stocks. “It can be a reasonably big source of demand for some of these companies,” said Sam Angus, a partner at Fenwick & West.
The last thing Snap needs right now is more bad news. After pricing its IPO at $17 per share in early March and seeing an initial bump in the stock market, it has mostly been in steep decline ever since. Tuesday’s closing price was less than half of the $27.09 we saw on March 3.
Snap had a disappointing first quarter earnings results, so there’s extra pressure for it to outperform when it reports next week. Plus, many employees will not be eligible to sell shares until later this month at the next lockup expiration. If enough of them exercise their options, it will send the stock further in decline.
But some analysts think that the lockup fears have been overblown and that a lot of employees won’t sell shares yet. Plus, for many employees who joined in 2015 or later, their shares are underwater and so it wouldn’t make sense for them to sell yet.
The big question for Snap is whether it will be able to maintain user growth. Instagram copied its “stories” feature last year, which seemed to be a big blow to its service.
Yet Snap has proven to be innovative and could continue to do so. From disappearing messages to stories to AR-enhanced “lenses,” the company continues to have new ideas. Perhaps Snap is working on something that will be the next big thing.