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May 10, 2017

S3 Research: Wayfair Shorts Down $150 million on 1st Quarter Earnings Beat

Wayfair Inc (W US) reported quarterly earnings and beat expectations on many levels which was rewarded by a 20.73% stock price move. Revenues came in at $994.8 million, up 28.6% year-on-year and handily beat expectations of $935 million. Active customers rose almost 46% to 8.9 million and orders per customer rose from 1.71 to 1.73.

Short sellers, including Citron Research, are not just holding steady, but are building their positions. Short interest is now at a historical high of $857 million, up $320 million, or 60% since the end of the 2nd quarter and up $450 million, or 110%, year-to-date. The cost to borrow stock has risen to a 6% fee and availability is starting to tighten. Although there is still stock available to borrow, if short demand continues to grow, rates will spike over the 10% fee level very soon.

Wayfair was the fifth most shorted stock in the Internet Retail sector and had the third largest monthly increase in short interest, trailing only Amazon.com and Priceline.com. All of the top five shorts had an increase in their short interest, but none of the top five shorts in the Internet Retail sector have been profitable in 2017.

Wayfair short sellers were paying, on average, an 8.65% fee to finance their shorts in 2016, but didn’t mind as they made $123 million in net of financing mark to market profits, a 25.0% return on an average short position of $492 million. Even before yesterday’s 20.73% price move, short sellers were not having a profitable 2017. They were down $216.4 million, a negative 42% return on an average short position of $520 million. Yesterday’s $10.60 stock price increase added an additional $150 million in losses to short sellers’ ledgers, bringing their year-to-date net loss to $366 million.

We will see over the next few weeks whether Wayfair short sellers hold onto their positions, begin to buy to cover in the face of additional losses, or see this rally as an entry point to increase their exposure. But because stock borrow availability is beginning to get tight, additional shorting will become more expensive. Short sellers will hope that their thesis is correct and correct quickly.

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
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