Snap Stock: Don't Jump In Just Yet

Snap Inc (NYSE:SNAP) stock could be headed way lower in the near term. Here are 3 reasons why.

Snap stock - don't jump in to buy the stock yet

S&P Dow Jones Indices' decision to exclude stocks with multiple classes of shares from key indices has left  Snap Inc (NYSE:SNAP) staring down the barrel. The decision effectively bars Snap stock from being included in key indices, starting with the S&P 500, among others. Exclusion from such indices is likely to have a big impact on the stock in the long term. As more and more money gets allocated to ETFs that track chosen indices, Snap stock will find less takers. Additionally, Snap's lockup expiry, which will become effective later this month is going to make a huge number of shares available for trading. As if that's not enough, Snap is scheduled to report its second quarter earnings on 10th August, which could turn out to be another high risk event. Snap shares have fallen by about 30% since the end of June, potentially coming across as a good bargain. However, investors would do well to stay away from the stock for now.

S&P Exclusion A Big Blow For Snap Stock.

S&P Dow Jones Indices has decided to exclude companies with multiple classes of shares from its major indices. The issue came to the fore when Snap sold shares with zero voting rights via its IPO, raising concerns around the massive concentration of power and questionable corporate governance. After all, why should promoters hog control of the company, offering co-owners (shareholders) no say at all in key matters? While this is not a new practice, with the likes of Alphabet (NASDAQ:GOOGL), Berkshire Hathaway (NYSE:BRK.A) and Facebook (NASDAQ:FB) having multiple classes of shares, Snap has set a precedent of sorts. Snap Inc is possibly the only company to have sold 'only' non-voting shares via its IPO, thus giving investors absolutely no voice at all. Companies commonly allow promoters to hold shares with significantly higher voting rights when compared to ordinary shares. By virtue of having pretty much every variety of shares under the sun, Alphabet Inc is a good case to look at.

Alphabet, then known as Google, announced a confusing stock split in Jan 2014. Without getting into unnecessary details, the resulting structure had three classes of shares. Class A shares were the variety average investors had been holding all along, entitling them to 1 vote per share, while Class B shares were held only by the top management, allowing them 10 votes per share. The new class of shares created, Class C shares, had no voting rights. Most companies dabble with similar structures, giving investors the option to buy shares with voting rights, if they wish to, which is why Snap's case is unique, and undesirable from a corporate governance standpoint. To discourage this practice, and protect investors investing in ETFs that track popular indices, S&P has decided to bar companies with multiple classes of shares.

Interestingly, though, the new rules don't apply to companies like Alphabet and Facebook, which are already part of the S&P 500, possibly because of the ramifications of removing such big components, and because they do offer 'some' albeit unequal voting rights, unlike Snap. With more and more investors opting for ETFs and passive investments as opposed to actively manage funds, Snap's exclusion from major indices will leave it devoid of any support from such funds, and comes as a big blow to shareholders.

Snap Stock - More Trouble In The Near Term.

Snap's lockup expiry on Monday made 400 million shares available for trading. However, the effect may not have been felt yet. These shares are held largely by the company's top management and early investors, who are in the middle of a blackout period ahead of Snap's second quarter earnings, due to be announced on August 10th. Further, these shareholders may even go easy on selling in the near term, given the kind of correction we're already seeing in Snap's stock price. However, close to double the number of shares will get freed up on August 14th, when another important lockup expires. On 14th August, employees will be able to sell up to an additional 782 million shares, resulting in about 97% of Snap stock becoming available for trading. Incidentally, that's also the day when Snap's blackout period ends, thus enabling those shares to be actually sold.

This is of great importance to shareholders since it comes just 4 days after Snap's second quarter earnings release. Unless Snap manages to impress the street with strong user growth numbers, the road ahead looks increasingly tough for shareholders. On a positive note, short interest in Snap stock is high, at nearly 18% of the company's float. So, a positive outlook could potentially spark off a big rally, with new found enthusiasm and short covering potentially driving the stock higher. From a technical analysis standpoint as well, Snap shares are close to oversold territory, as we discussed in our daily technical analysis post. Investors would do well to avoid the stock going into second quarter earnings. If you're looking for technical trading ideas, check out our daily trading ideas section. If you're also looking for fundamentally solid stocks, you should also take a look at our top stock picks from the tech sector, which have beaten the NASDAQ by over 136%.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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