Lyft Inc. went public just over a few weeks ago in what most agree is the year’s highest profile IPO-to-date. Since that time the company has seen its stock price continue to dwindle in what could be labeled as a minor disaster for early investors of the world’s second largest mobile ride-hailing company.
Shorting a stock
Lyft’s ()NASDAQ:LYFT) short interest is at an all time high for the newly listed company, but first a little on the practice of shorting a stock.
$LYFT short interest is $1.08 billion; 17.97 million shares short; 55.31% of float; 2.13% stock borrow fee & trending up, new shorts at 3.79% fee. pic.twitter.com/NbUs3Zd5Mi
— Ihor Dusaniwsky (@ihors3) April 15, 2019
Short selling is the opposite of purchasing long stocks in a company. Shorts will borrow a stock and sell it with the hopes that the security will fall in price. Should that happen, the borrower of the stock doesn’t have to pay back the original price since the value has dropped below the level at which the stock was borrowed, and in that way the short seller can make money when a stock declines in value. The bearish investor would close out his or her position of the stocks at the lower price, and any difference would be realized as a gain. Of course, should the stock increase in price, the short seller would have to buy the stock back at the higher price.
In this case, short sellers have been making a small fortune off of Lyft. Shares of the company are down 22 percent from the IPO price, and things aren’t looking any rosier as we look ahead if the amount of short interest in the company is anything to go by.
A way to gauge investors’ sentiment is to look at the ‘short interest’ of a security. This is the amount of shares that have been borrowed by the short sellers but that have not yet been closed out. Put simply the amount of short interest is the percentage of investors who think a stock will drop in price. Its by no means a silver bullet since many will argue that with high short interest comes too much selling, which could signify a bottomed-out entry point for bulls.
Lyft’s short interest has reached staggering levels
Lyft’s short interest is around $1.08B, which represents over half of the current float, or available shares! 55 percent to be exact. So there are more shares in the wild that were purchased with the intention of short selling than holding long in Lyft’s case.
Its not surprising why, as Lyft may be facing an uncertain global economic sentiment, all while desperately needing to show big time growth to ever have a hope of becoming profitable. While Lyft’s long term prospects aren’t certain, the short term prospects of short sellers have been quite lucrative.
S3’s predictive analytics chief Ihor Dusaniwsky said that post-IPO short sellers have made over $200 million dollars by betting against the stock.
Could this be foreshadowing what might happen to Uber? Its possible, but it could also mean that some investors are pulling out in anticipation of the opposite, that Uber could come out looking strong and provide gains for early investors. Regardless, Lyft’s abysmal run so far is casting a long shadow over rival Uber’s impending IPO which is expected to land early next month.
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