Snap is about to face the biggest reckoning of its short history as a public company.
On Saturday, the company's post-initial-public-offering stock lockup is set to expire, allowing early investors, employees, and insiders to sell shares for the first time.
It couldn't come at a worse time for Snap, which has plunged by 19% since pricing its IPO on March 1. The company's stock has fallen more than 16% this month alone, and it was down 1.7% as of 10:13 a.m. ET on Friday.
"We see further trouble ahead for investors in Snap as employee lock-ups expire," the research provider Management CV wrote in a note to clients. Company executives, it said, "are facing slowing growth rates and we think the expiration of insider's lock-up provisions from the IPO may collide with investor interests."
Though the company is struggling, there's one group that will welcome the lockup expiration with open arms: those traders betting against its stock price. The likely influx of new shares hitting the market will make it cheaper to borrow the stock to short.
While borrowing fees of 50% to 60% have made shorting Snap prohibitively expensive to most investors, that cost will shrink to about 5%, according to data compiled by the financial analytics firm S3 Partners.
For context around just how expensive Snap shorts have become, short sellers were paying a whopping $1.7 million a day in borrowing costs to pay for their bearish bets earlier this week. That meant Snap shares had to fall by 5% every month just to cover financing costs, according to S3 data.
That's all about to change.
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 it 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.
SEE ALSO: It's about to get a lot easier to bet against Snap
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