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May 16, 2017

S3 Research: SNAP Short Interest Hits $1 Billion Intraday – Short Squeeze May Follow

Snap Inc. (SNAP US) short interest has traded in a $730 million to $900 million range during the second quarter but as the stock recently tested the $18 support level short sellers increased their positions when SNAP’s stock price rebounded close to  $21/share. There has been almost $200 million of new short activity in the last week, including today’s intraday trading, bringing today’s short interest to $1 billion. 

SNAP short sellers are still profitable post-IPO. Even after SNAP’s recent mini-rally short sellers are up $44 million year-to-date. In fact, of the top five most shorted stocks in the Applications Software sector, SNAP short sellers are the only ones in the black.

SNAP short interest is up $174 million, or 21%, since the end of the 1st quarter as shorts sellers quickly put on $827 million of short exposure in the first month after SNAP’s IPO on March 2nd. Now that SNAP hit $1.001 billion there will be minimal growth in its short interest levels as almost all of SNAP’s stock available to borrow has been taken down.

Borrow rates on existing short positions were trading at General Collateral (the cheapest borrow rate for the easiest to borrow stocks) or slightly above G.C. rates as early as last week. But with new short selling hitting the street like a flash flood, rates have spiked dramatically. Rates on existing borrows have risen to 5% - 7% fee while borrow rates on new positions have ballooned to 45% - 60% fee. Rates on existing short positions will rise quickly as there is virtually no stock borrow supply left on the street and there were over 1.5 million shares recalled by lenders.

If short selling demand remains strong, and stock borrow recalls continue, we will see SNAP stock borrow rates near the 100% fee level within a week. With a perfect storm of no stock left to borrow, high stock borrow rates, active stock borrow recalls and a rising stock price we may see an actual short squeeze in SNAP in the coming weeks.

One thing is for certain, with no new stock borrows to support additional shorting and short sellers buying to cover their positions to cover recalls, realize profits or escape high borrow rates, it will be the long shareholders who will be controlling SNAP’s price moves for the near future. If SNAP’s stock price declines it will because of long shareholders selling their stock and if SNAP’s stock price increases it will be because shorts are buying to cover their positions and longs are bidding up the stock price as they build their positions.

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