Hedge funds are betting $1 billion that Snapchat shares are going to drop

Key Points
  • S3 Partners says traders increased their short positions against Snap by $200 million during the last week to top $1 billion in total.
  • An additional 1.2 billion Snap shares will become available for sale in July and August, which may dampen the stock price, according to JPMorgan.
  • To be sure, the extreme increase in bets against the Snapchat parent could cause a so-called short squeeze rally in the shares.
Traders are increasing their bets against Snap shares

Traders are significantly increasing their bets against Snap shares, according to data from a financial technology firm.

Short interest, or the number of shares borrowed in hopes of buying them back at a profit after a drop, increased by $200 million in size during the past week to total $1.001 billion in the Snapchat parent's shares, according to S3 Partners estimates in a note sent to clients Tuesday. This kind of trading is mostly done by sophisticated hedge funds.

Snap missed revenue estimates and posted slower-than-expected user growth last week in its first quarterly report since going public. Its stock plummeted more than 21 percent on May 11, a day after the release.

Some bearish investors may be counting on continued share weakness due to an additional 1.2 billion Snap shares, or 84 percent of the company's shares outstanding, becoming available for sale from the end of July through August.

Many insiders are restricted from selling stock for an agreed upon lockup period after the initial public offering, but that changes later this summer when more shares will likely come onto the market.

"We expect attention to turn to SNAP's July-August lock-up expirations. Snap has 150- & 180-day lock-up expirations beginning July 31," JPMorgan's Doug Anmuth wrote in a note to clients Thursday. He reiterated his neutral rating on Snap in the report.

Nearly 70 percent of Wall Street does not have buy ratings on Snap shares, according to FactSet. Such a mixed view on a large technology IPO is a rarity.

To be sure, the increased bets against Snap also raise the chances of a so-called short squeeze, where a rebound in the stock is fueled by these hedge funds rushing back in to close out their short position.

"With a perfect storm of no stock left to borrow, high stock borrow rates, active stock borrow recalls and a rising stock price we may see an actual short squeeze in SNAP in the coming weeks," said Ihor Dusaniwsky, head of research at S3, in a note.

Disclosure: NBCUniversal, the parent company of CNBC, is an investor in Snap.