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Oct 17, 2016

S3 BLACKLIGHT: Twitter Short Sellers Return as Potential Suitors Leave

Twitter Inc. (TWTR US) short interest has been on a roller coaster ride in 2016 levels going from $1.3 billion at the end of 2015 to under $800 million in February 2016 and back up to $1.2 billion by mid-August. Short interest fell again as Twitter’s stock price hit a year to date high on October 5th of $24.87 on takeover rumors linking them with a variety of suitors, short balances fell to $820 million by October 10th as the price increase squeezed out almost $300 million of short positions.

But as Alphabet Inc. (GOOG US), Facebook Inc. (FB US), Walt Disney Co. (DIS US) and Salesforce.com (CRM US) backed out on their initial interest, Twitter’s stock price dropped by almost a third to $16.75. Since nature abhors a vacuum, short sellers have jumped the void left by the cash rich but apprehensive potential buyers and shorted over $350 million worth of Twitter stock in the last week, a 44% increase.

With short interest back up to $1.2 billion, the momentum we see in the S3 Velocity Indicator, a measurement of the real-time relative change in shorting activity looks to be continuing for the short term as both the 7 Day and 30 Day trend lines have crossed the 90 Day trend line with a very steep upwards trajectory. If short selling continues at this pace we may see Twitter test its year to date low and of $14.01.

If Twitter stock does fall to yearly lows its market cap will be $2 billion lighter. Twitter looked like a takeover target at a market cap of $17.6 billion, would the company look like a more palatable takeover target at a market cap below $10 billion? Short sellers have profited from the collapse of Twitter’s M&A premium and are hoping to ride the stock down to its $14 support level. If Twitter’s stock price hits a level that looks appetizing for any of its previous suitors and M&A rumors re-emerge, shorts should be ready to buy back their positions before Twitter’s stock price spikes once again. In addition to long shareholders buying Twitter stock in hopes for a retracement to its year to date high of $24.87, short sellers will be trying to get out quickly and realize some of the profits they earned this month. Buy side pressure from both the long and short side should make for a steep price move once the first 140 character merger rumor is tweeted.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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