It's about to get a lot easier to bet against Snap (SNAP)

pulse

July 25, 2017 3:27 PM

It's gotten expensive to bet against Snap, but it'll become affordable again after the company's post-IPO lock-up expires.

Snap CEO Evan Spiegel speaks onstage during 'Disrupting Information and Communication' at the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on October 8, 2014 in San Francisco, California.

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.

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
August 14
August 14
August 29

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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