It’s about to get a lot easier to bet against Snap

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Evan Spiegel is surely not thrilled about the potential for cheaper Snap shorts.
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Getty/Michael Kovac

It’s gotten quite expensive to bet against Snap.

That’s what happens when everyone wants to wager on a company’s decline. Down 17% since going public in March, Snap is living the unavoidable reality of a company that goes public with a sky-high valuation and then fails to live up to growth expectations as bears circle.

For context, short sellers are paying a whopping $1.7 million a day in borrowing costs to pay for their bearish bets. That means Snap shares have to fall by 5% every month just to cover financing costs, according to data compiled by the financial analytics firm S3 Partners.

But shorting is about to get a whole lot cheaper.

That’s because the company’s post-initial-public-offering stock lockup is set to expire Saturday, allowing insider shareholders to sell the stock for the first time. While borrowing fees of 50% to 60% have made shorting Snap prohibitively expensive to most investors, that cost will shrink to about 5%, S3 says.

S3 thinks that, in turn, will push short interest – a measure of bets that share prices will drop – higher by about 50%. Such an increase, totaling $500 million to $550 million, would push short interest above $1.5 billion, its highest since the IPO.

It would mark a minor recovery for short interest, which peaked for the year at $1.44 billion on June 1 then declined along with Snap’s stock price as bearish speculators took profits by covering their positions. The measure is down $273 million in July alone amid rising shorting costs.

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Snap short interest has declined along with the share price, but that will change once the company’s post-initial-public-offering lockup period is over.
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S3 Partners

Here’s a handy guide for tracking how many shares will be freed up from post-IPO lockup constraints over the next few weeks, courtesy of S3:

    July 29 – 400 million shares from early investors August 14 – 182 million shares from employees August 14 – 600 million shares from directors, founders, insiders August 29 – 20 million shares from early investors

It’s likely that early investors will end up selling at least some of their shares, S3 says. The firm estimates that 10% to 30% of their shares will land in lending accounts.

As for the stock owned by employees, directors, and insiders? Don’t necessarily count on their hitting the market anytime soon.

But that shouldn’t matter for short sellers in the immediate term. Their borrowing costs are almost certain to come back down to previous levels, at which point it’d be open season once again.

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Snap is down 17% since its March 1 IPO.
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Markets Insider