The end of six-month lock-up periods on shares of some recently listed US web companies led to sharp sell-offs across the sector on Monday.
Some investors have feared that tech companies that floated small percentages of their shares in initial public offerings, such as Groupon and LinkedIn, now trade at unrealistic valuations due to scarcity that makes it expensive to borrow shares and bet against them.
LinkedIn and Yandex saw their post-IPO six-month lock-ups expire over the weekend, meaning that many company insiders, including executives and pre-IPO investors, can now freely sell shares.
Shares in LinkedIn, the social network focused on professionals, fell 2.8 per cent to $70.00 on Monday, its lowest closing price since June. Its shares have now fallen 23 per cent since announcing a $600m secondary offering in early November.
Yandex, the Russian search engine group, fell 8.9 per cent on Monday to $19.72, its lowest close since early October.
While Yandex floated some 40 per cent of its shares in May, LinkedIn sold just 8.3 per cent, far below the average since 2001 for tech companies of 27 per cent, and 40 per cent for all groups, according to Ipreo, a capital markets data provider and advisory.
There were also sharp sell-offs for online coupon-seller Groupon, which fell 10 per cent to $23.58, and real estate web site Zillow, which fell 13.1 per cent to $23.52, even though those groups’ lock-ups do not expire until next year.
Groupon floated 5.8 per cent of its shares this month, the second smallest of any deal since 2001, according to Ipreo, while Zillow sold 20 per cent in July.
“At the end of the day, the market is based on supply and demand, and it changes the dynamic when more shares become available,” said Mike Bellafiore, head trader at SMB Capital.
“The heat map is glowing red for companies that floated small IPOs, and they are being heavily traded by momentum players,” he added.
LinkedIn, which has seen its percentage of shares sold short drop from 46 per cent earlier this month to 18.3 per cent on Monday, is still among the most expensive stocks to short, according to Data Explorers, which collects data on stock lending.
Analysts at Trefis, an independent research firm, said they believed fair value of LinkedIn shares was $43, adjusting for likely future insider selling and their own lower growth estimates.
“We don’t see growth slowing but we’re not as positive as the market is to justify the current valuation. The price-to-earnings ratio is still astronomically high,” said Cem Ozkaynak, senior analyst at Trefis.
The group is still valued at 132 times next year’s earnings, versus 17.5 times for the broader Russell 1000 Growth index.
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