It's about to get a lot cheaper to bet against Snap

Evan SpiegelGetty/Michael KovacEvan Spiegel is not thrilled about the potential for cheaper Snap shorts.

It’s gotten quite expensive to bet against Snap.

That’s what happens when everyone wants to wager on a company’s decline. Down 17% since going public in March, Snap is living the unavoidable reality of a company that goes public with a sky-high valuation, then fails to live up to growth expectations as bears circle.

For context, short sellers are currently paying a whopping $US1.7 million a day in borrowing costs to pay for their bearish bets. That means that Snap shares have to fall by 5% every month just to cover financing costs, according to data compiled by financial analytics firm S3 Partners.

But shorting is about to get a whole lot cheaper.

That’s because the company’s post-initial public offering stock lock-up is set to expire on July 29, allowing insider shareholders to sell the stock for the first time. While borrowing fees of 50% to 60% have made shorting Snap prohibitively expensive to most investors, that cost will shrink to around 5%, S3 says.

That, in turn, will push short interest — a measure of bets that share prices will drop — higher by about 50%, S3 estimates. That $US500 million to $US550 million increase would push short interest above $US1.5 billion, the highest since the IPO.

It would mark a minor recovery for short interest, which peaked for the year at $US1.44 billion on June 1, then declined along with Snap’s stock price as bearish speculators took profits by covering their positions. The measure is down $US273 million in July alone amid rising shorting costs.

Screen Shot 2017 07 25 at 9.11.52 AMS3 PartnersSnap short interest has declined along with the share price, but that will change once the company’s post-IPO lock-up period is over.

Here’s a handy guide for tracking how many shares will be freed up from post-IPO lock-up constraints over the next few weeks, courtesy of S3:

  • July 29 — 400 million shares from early investors
  • August 14 — 182 million shares from employees
  • August 14 — 600 million shares from directors, founders, insiders
  • August 29 — 20 million shares from early investors

It’s likely that early investors will end up selling at least some of their shares, says S3. The firm estimates that 10% to 30% of their shares will land in lending accounts.

As for the stock owned by employees, directors and insiders? Don’t necessarily count on them hitting the market anytime soon.

But that shouldn’t matter for short sellers in the immediate term. Their borrowing costs are almost certain to come back down to previous levels, at which point it will be open season once again.

Screen Shot 2017 07 25 at 9.22.48 AMMarkets InsiderSnap is down 17% since its March 1 IPO.

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