(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Snap Inc.'s (SNAP) stock has had a massive rally since May 29, with the price jumping by over 23%. However, those significant gains may be about to reverse, based on the dramatic increase in the cost to borrow the stock to then sell short. The cost to borrow shares of Snap has soared, rising by more than 10-fold. Additionally, technical analysis, suggests shares of the company may be set to plunge by 14% or more in the coming weeks. 

In the middle of May, options traders had been betting that shares of Snap would fall to a record low, to just $9 by October. The reason for all the negative sentiment may hinge on the company's weak fundamentals, which continue to get even worse. Since April 30 analysts have slashed their revenue and earnings outlook substantially. (See also: Snap's Stock Seen Plunging 16% to New Record Low.)

Borrow Costs Surge

The cost to borrow shares of Snap to then go short has skyrocketed since June 5, rising from an annualized rate of 2.5% to approximately 22.2% today, a massive jump, according to data provided by Trade Alert. The sharp rise in the cost to borrow the stock suggests there has been a significant surge in demand for shares, and supply may be running thin. It means traders are betting that shares of the social media company may plunge in the coming weeks. 

Weak Technical Chart

The technical chart suggests shares could drop from its current price around $13.05 to roughly $11.20 in the coming weeks. Shares of Snap have refilled the gap created after the stock fell following quarterly results on May 1 from $14.13 to only $11.03 the following day, a decline of about 22%. The price has now regained the significant losses, and after hitting technical resistance around $13.66, shares are likely to resume their previous trend, which is lower, toward technical support at $11.20, a decline of about 14.5% from its current price.

 

Fundamental Deteriorate

The short sellers likely see an opportunity to load up on the bearish bet given the stocks sharp rise. Analysts continue to cut estimates for the company, and now see revenue at only $1.188 billion in 2018, down from $1.325 billion on April 30, a drop of 10.3%. Meanwhile, the loss for Snap is expected to be larger than previously forecast, with the company now predicted to lose $0.60 per share, down from a loss of $0.55 per share, a decline of 9%. But it doesn't stop there, because the revenue outlook in 2019 has been lower by 14% to 1.72 billion, while the company is now seen losing $0.43 per share, 16% lower than the previous forecast. 

SNAP Revenue Estimates for Current Fiscal Year Chart

SNAP Revenue Estimates for Current Fiscal Year data by YCharts

It had appeared for a bit that perhaps Snap's stock may have found a bottom, but it seems that traders are betting it was nothing more than a dead cat bounce

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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