It's finally here. After a long, exhilarating six months, all those shares of Twilio (TWLO) owned by insiders in its major initial investors in the late-June IPO are going to become free-trading shares as of Tuesday, allowing those holders to sell their positions and walk away with -- despite a 58% pullback from September's high -- a solid 100% profit....
... if that en masse selloff doesn't wipe away the decent price we're seeing right in front of the end of the lockup period.
Twilio has been one of 2016's more ballyhooed IPOs. The company provides telecommunications services to its customers using a cloud-based architectures, lowering costs as well as increasing convenience.
It's a remarkable leap forward from a technological point of view, though in this particular case, being a technological marvel doesn't pay all the bills. Although it's growing fast, it's going to be a long while before the current market cap of $2.55 billion is going to be justified. Over the course of the past twelve months, Twilio has generated $246 million worth of revenue, and lost $37 million. From where it is to where it needs to be is a very long trip.
TWLO shareholders largely recognized that reality a few months ago, when the euphoria of the IPO finally started to wear off. Though Twilio shares jumped from June's IPO price of $15 to a peak near $71 in late June, the stock's peeled back to a price near $29 in the meantime.
And those weren't the initial buyers doing the selling... at least not the bulk of them. For most of the biggest initial investors, their shares are restricted from being sold during the first 180 days of their existence.
Tuesday, December 20th, is the 181st day.
The consensus is that the flood of new supply will work against TWLO, pulling the rug out from underneath the price. The question is, to what degree? There's no clear answer. But, we do know the current active (non-restricted shares) float is around 21.5 million shares, but could jump to something on the order of 34.4 million once the lockup ends. That's a big injection of supply.
At the same time, 8.8 million shares of TWLO are sold short, meaning traders have sold them now with the aim of buying them back later at a lower price. It's a very risky bet, but the fact that it's become such a popular bet (relative to its float) speaks volumes.
And yet, there's a silver lining to the cloud of such a massive number of short trades. That is, for those traders to close out their positions and lock in any gain, they have to buy TWLO shares. That could, and will, put bullish pressure on Twilio.... too much, in fact, unless there were a specific selling catalyst in the cards. One has to wonder if Tuesday's end to the lockup period will provide all those owners of short trades with enough bearish/selling pressure to close out (or buy back) those short positions without creating an inordinate amount of buying demand.
In other words, in an ironic and twisted way, the sellers and the buyers may be doing one another favor on Tuesday, providing a much-needed market for both groups, and creating some much needed buying/selling balance.
Even so, with 8.8 million shorted shares to cover and roughly 11 million shares to sell at the end of a lockup (not that they all have to be sold) for a stock that normally only trades 3.4 million shares per day, even a modest imbalance of buyers and sellers could wreak havoc.
Prediction: The current owners are less desperate to get out than the short-sellers are right now, so after an initial but sizable knee-jerk dip, this could all actually set TWLO up for a rebound rally, spurred by traders covering their short trades.
Just not that it could take two or three days -- and maybe even a little longer -- for the dust to settle. Either way, the one thing working the most against Twilio here has been the concerted effort from the short-sellers to keep pushing it low in anticipation of Tuesday's milestone. Once it's in the past and IF short interest starts to abate , the stock has a shot at moving higher again.... even just for speculative reasons, and not for fundamental ones. Fundamentally, there's still not enough value here.