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Jun 7, 2017

S3 Research: SNAP down 4% & Shorts Up $39 million on Negative Nomura Analyst Research Note

Nomura Instinet analyst Anthony DiClemente wrote a research note on Snap Inc. (SNAP US) which stated that daily average user growth for the first two months of the 2nd quarter had slowed. Recently, Snap management stated that a “seasonality” effect had negatively impacted user acquisition, but a more likely reason for Snap’s difficulty in growing its user base and monetizing its platform is the direct competition it is fighting off from Google (GOOGL US), Facebook (FB US), Instagram (acquired by FB) and WhatsApp (acquired by FB).

Snap’s stock price is down almost 4% today on the back of the research note and is below $20/share, at $19.55, for the first time since mid-May. Snap is the third largest short in the Application Software sector and has had the largest increase in short interest in the sector over the last month.

Today’s price drop added $39 million to SNAP’s short sellers’ bottom line, bringing their YTD profits to $52 million. With short interest over $1 billion there are not many shares left to borrow and the cost to finance short positions has increased from 1% fee in early May to 37%-40% fee on existing stock borrows and over 50% fee on new stock borrows. It’s now costing over $1 million/day in stock loan fees to finance all of Snap’s short positions.

With total daily Snap stock borrow costs just over $1 million, short sellers are eagerly awaiting Snap’s lockup expiries when more stock will be available to borrow and stock borrow rates should decline. With a combined total of 1.2 billion shares to be released on July 31st and August 31st we can expect stock borrow costs to drop back down to the 1% fee level and below. With Snap shares becoming easier and cheaper to borrow we can also expect more short demand as traders who might have been reluctant to borrow stock at levels above 30% fee, might find the net of financing Alpha more profitable at a 1% borrow fee.

Historically, post lockup expiry trading of IPO stocks has shown mixed results. While Facebook’s and Twitter’s stock prices dropped significantly, Alibaba’s stock price was relatively flat and Twilio’s stock price went up. With short interest increasing even at these expensive borrow rates, it looks like short sellers are positioning themselves for a dramatic selloff in Snap’s stock price after the lockups expire. If they are waiting for a selloff on August 1st they will be paying over $58 million dollars of stock borrow fees, at these fee levels, over the next 54 days. With just over 50 million shares shorted, Snap’s stock price will have to fall 6% for the shorts to cover their borrow costs until the first lockup expiry day. They are hoping Snap’s post lockup stock price move is more like Twitter’s and not Twilio’s.

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