Snap Inc. (SNAP) reported strong quarterly earnings yesterday with revenues up 72% year-on-year and a net loss of $350 million which was less than analystâ€™s expected. Daily active users, a metric of market wide relevance in the social media sector, rose by 8.9 million in the quarter. Investors responded by lifting Snapâ€™s stock price up 48% yesterday, pushing it over $20/share for the first time since June 2017.
Snap short interest is $2.1 billion, the largest short in the Application Software sector and short exposure increased by $706 million in the week prior to their quarterly earnings release. Clearly, short sellers were not expecting a blowout quarter and were positioning themselves for weak results. In fact, four out of the five most shorted stocks in the sector saw an increase in short interest over the last week. Overall short interest in the Application Software sector is $17.1 billion with short exposure increasing by almost $1 billion in the last week.
Investors have been building their short exposure in the five most shorted names in the sector even though they are down $972 million in mark-to-market losses for the year.
|W.W. Application Software|
(in $ millions)
|1 Wk Change|
|Adobe Systems Inc||ADBE||$886||+$147||-$67.7||+$32.9|
|U.S. Application Software||$17,094||-$968|
Snapâ€™s short interest has been growing since its IPO in March of 2017. Short interest averaged $1.2 billion in 2017 and shorts made $192 million in mark-to-market profits as its stock price fell below its IPO price within half a year. Short interest hit its previous historical high of $1.99 billion in October 2017 as shorts piled into name with Snapâ€™s stock price falling into the low teens. With short demand high and stock borrow inventory dwindling, financing fees averaged over 16% fee for the year. Short sellers paid over $165 million in stock borrow costs in 2017, and still managed to earn a $192 million mark-to-market profit for a +15.7% return on the short side.
In 2018, short pressure subsided with average short interest down to $1.4 billion and stock borrow costs at 2.67% fee today. Yesterdayâ€™s +$6.69 price move pushed Snap short exposure back over the $2.0 billion mark. The 48% rally cost short sellers $681 million in mark-to-market losses. Todayâ€™s 6.6% drop made shorts $139 million in mark-to-market profits, making back just over a fifth of yesterdayâ€™s losses.
(in $ millions)
|Average Short Interest||Year-to-Date|
Mark-to-Market P/L %
Short activity in Snap has been active today, with offsetting shorting and buying to cover in size. Today, traders were either looking for a continuing rally and covered some of their exposure or a pullback from yesterdayâ€™s large gains and shorted more stock. We are still seeing a net bearish sentiment in the stock, and are expecting to see more short selling in the near future.
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Managing Director Predictive Analytics, S3 Partners, LLC
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