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

Shares of Snap Inc. (SNAP) could start coming under pressure again and fall as much as 20 percent in upcoming weeks, meaning the recent rise will be a thing of the past. The cost to borrow shares of the social media company surged to over 16 percent Wednesday. That means short sellers are looking to borrow shares to place bearish bets.

Meanwhile, Snap's technical chart looks as though it is completely breaking down, just as Wall Street has been lowering revenue estimates for the third quarter. Snap already saw its short interest surge by 25 million shares as of August 31, but that number could rise again, and the stock could be looking to retest the lows seen in August. (See more: Snap's Short Interest Surges By 25 Million Shares.)

The cost to borrow shares to use and sell the stock short rose by almost 12 percentage points on September 20, to over 16 percent. That sends a message that the number of shares left to borrow is thinning out because traders are once again betting the stock will fall.

Snap closed at a critical technical support level on Wednesday, right around $14. The short sellers likely realize this, and could be inclined to press shares lower in an attempt to break the backs of the bulls. Should Snap's stock break the technical support level at $14, it could retest the lows of around $11, a decline of nearly 20 percent from the September 20 closing price of $14.

Rising Costs to Borrow

The graph below shows how the borrow rate on Snap shares suddenly spiked Wednesday. A rising cost to borrow means shortseller demand to borrow the stock is rising. This suggests that traders are looking to get into Snap because they expect it to fall in the coming weeks.

(Interactive Brokers)

Deteriorating Technical Chart

The hourly chart below shows how Snap finished trading on September 20, resting on a critical technical support level right around $14, denoted by the orange line. Should the stock break below that support, it will likely fall back toward the lows, around $11.

Additionally, revenue estimates have been falling as well, with third-quarter revenue projected at just $241.9 million. Those expectations have dropped by nearly $30 million, or 11.5 percent, since the mid-August estimates of $273.83 million.

Additionally, the chart also shows how Snap Inc. has failed to meet revenue estimates in both of its first two quarters of 2017.


Investors appear to be increasingly bearish on Snap's near-term prospects. Traders seem willing to pay a high rate to borrow shares in anticipation of the stock falling due to deteriorating fundamentals and technical signals.

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 holdings. Information 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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