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Jul 24, 2017

S3 Analytics: SNAP Lockup Expiry will Boost Short Interest Levels

SNAP Inc. A (SNAP US) short interest decreased by $273 million in July, and is currently at $1.003 billion today. Short interest peaked on June 1st at $1.44 billion and has decreased along with SNAP’s stock price with short sellers covering some of their positions.

Existing stock borrows are priced at a 59% fee and new borrows are at fees between 65% to 68%. Supply continues to be very tight and there have been recalls on the street, which has decreased the lending pool even further. There are 3-4 million shares left on the street to borrow and if most of those shares get taken down we could see borrow rates top 100% fee in the week ahead of the lockup expiration.

One of the primary reasons short interest has declined is the high cost to borrow sock to support short positions. Short sellers are paying $1.7 million per day in borrow costs to finance their shorts, which means that SNAP shares have to drop by 5% every month, or $0.71, just to cover financing costs. The net of financing expected Alpha is not attractive enough for some short sellers and they have either decided not to enter this trade or are starting to exit it.

Fortunately, SNAP’s lockups will be expiring on 7/29 and 8/29 which will replenish the lending pool and reduce stock borrow rates. There will be 1.2 billion shares released from their lockup constraints over the next 5 weeks.

7/29       400 million shares from early investors
8/14       182 million shares from employees
8/14       600 million shares from directors, founders, insiders
8/29       20 million shares from early investors

There is a good chance that the 782 million shares owned by employees, directors, founders and insiders will not be immediately sold and land in lending accounts. But we estimate that between 10% and 30% of the 420 million “early investor” shares would be sold and end up in lendable accounts. Therefore we would expect SNAP’s stock lendable pool to increase by 40 to 120 million shares after the 7/29 round of post-lockup trading activity settles.

With SNAP’s present stock lendable pool being between 77 and 80 million shares, this new inventory would be significant and probably push borrow rates below 5% fee or even down to General Collateral levels, dependent upon on how many shares actually end up in the lending pool.

Stock borrow rates at over 50%-60% have made shorting SNAP unattractive for many short sellers – when stock borrow rates fall below 5% we can expect short interest to increase by 50%, much like Twilio’s (TWLO US) short sale history.  This would mean a 35-40 million share increase in short interest or $500 to $550 million more of short SNAP short exposure. 

Total SNAP short interest should grow to $1.5 billion when stock borrow rates ease after lockup expiry sales settle and short sellers see that their SNAP net of financing expected Alpha is more attractive.  

Want deeper insight into the above analysis? Contact:
Head of Data Analytics, S3 Partners, LLC
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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