Kylie Jenner tweeted that she does not open her Snapchat Inc. (SNAP) app anymore and the stock is down over 8% in mid-afternoon trading. Kylie’s tweet along with a system redesign that has alienated many of its users continues to drive SNAP’s stock price down. SNAP is the largest short in the Application Software sector with $1.99 billion of short interest with shorts increasing their exposure since the beginning of January.
(in $ millions)
|Adobe Systems Inc||ADBE||$878||-$213||-$147.1||-$2.8|
|Paycom Software Inc||PAYC||$711||-$8||-$154.2||-$2.5|
|Total Application Software||$17,509||+$399|
Shorts have been building their SNAP short exposure since its IPO in March 2017 with short interest topping $2 billion for the first time this February. Short sellers took a breather after shorting 40 million shares in the month after its IPO and short interest remained below $1 billion until mid-May 2017. Shorts took another breather for three months as SNAP’s stock price fell from the low $20’s to $12. This also coincided with a period of high rates for SNAP stock borrows, with fees topping 60% in mid-July.
With stock borrow rates dropping to 3% as the stock lending pool increased with SNAP’s lockup expiry’s, short interest began to grow significantly from August to October 2017. Shares shorted climbed from 69 million shares to 121 million shares in three months even though SNAP’s stock price rose from $11.83 to $16.50. Short sellers had a high conviction that there would be a reversal in SNAP’s rally.
Since late October, to just prior to SNAP’s latest earnings release short interest remained in a $1.3 to $1.7 billion dollar range. Shares shorted increased in January and early February as SNAP’s stock price declined in order to keep short exposure around the $1.5 billion level. SNAP’s 48% stock price spike after reporting strong 4th quarter earnings on February 6th pushed SNAP’s short exposure over $2 billion for the first time. Shorts began to cover some of their shares as exposure hit $2.2 billion, with short sellers being more comfortable at the $2 billion level and shedding $200 million worth of risk.
SNAP short sellers have been very profitable after its March 2017 IPO. Short interest averaged $1.3 billion in 2017 with shorts up $285 million, up +22.3%, even after paying $171 million in stock borrow financing costs for the year. Shorts are up another $256 million, or +15.5%, in 2018 after today’s 8% dip due to Kylie Jenner’s social media influence. If more Daily Active Users continue to switch their loyalty to Facebook’s Instagram app, short sellers will see their 2018 profits continue to climb and Kylie will not be the only one saying “ugh this is so sad“ but “still love you tho Snap.”
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Managing Director Predictive Analytics, S3 Partners, LLC
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