Elon Musk made big news recently when it was announced he was taking a 9% stake in Twitter and getting a seat on the Board of Directors. The timing is good to bring in Mandeep Singh, the senior analyst at Bloomberg covering the internet and technology sectors, to discuss the landscape of the space to see where he’s finding opportunities today.
Singh acknowledged that he was surprised to learn that Musk had taken a position in Twitter because it really came out of nowhere. He expected to see better quarterly financial results, but this was not a catalyst that he had identified. His thinking was that Twitter’s new management team would be allowed some time to implement changes, but Musk’s new influence could change the dynamics. Perhaps this was his intention all along and he suspects we’ll learn a lot more about how he went about doing this over time.
Musk’s plan could either be coming from his personal views on free speech, bots and things like that or he could be generally interested in improving the business. He could potentially help make the business run more efficiently. His focus may be on growth, but the notion that he doesn’t care about operational performance, Singh feels, is unfair. User growth, however, has slowed, monetization is still a problem, and the ad infrastructure needs to get fixed. A possibility is that Musk talks about taking Twitter private in the same way he threatened to do with Tesla.
From a macro perspective, Singh believes that a lot of the potential impact from the Fed’s upcoming rate hike cycle is already baked into tech stocks. A lot of companies have lost about 40% of their enterprise value. Some companies will eventually revert back to double-digit growth rates and he anticipates that better conditions will eventually return. He does feel that the pendulum has swung to the other end with slower growth, but notes AirBnB as a company that has held up well even though the travel & leisure sector hasn’t fully come back.
Singh says that companies who rely less on advertising should be able to hold up better. AirBnB, for example, gets 90% of its traffic directly. The company also doesn’t have the challenge of supply acquisition. Once a property gets listed, it tends to be really sticky. They have some leverage today, while Uber and Lyft are trying to expand into other categories for growth. In the future, partnerships will be the way to go for these companies.
Where does Singh see opportunities over the next 12 months? Over the medium to long-term, he believes SaaS companies have a healthy pipeline because everybody is going to need to ramp up their cybersecurity spending. This will be a secular growth story and enterprise software could see 30-40% growth going forward. There’s been some impact on valuations during the recent pullback, but the growth story is definitely there.
Other key takeaways:
- In terms of favorites within semiconductors, Singh notes that Nvidia has the best overall market exposure, but its valuation is 2-3 times the sector. AMD has a lot priced in. The group will probably decline over the next 12-18 months as the slowdown comes. You’ll have to be careful about what’s already being priced in. Valuations are extremely relevant.
- Singh doesn’t think we’ll see the extreme outcome where there’s a complete shutdown of supply chains, but companies will seek diversity. That could mean that inputs aren’t as low cost as before. Margins have likely peaked in the near-term.
- The metaverse names should continue to see growth, but some of the initial enthusiasm has faded. Companies will continue to spend on metaverse tech and virtual environments, but there could be some issues as the travel & leisure space reopens.
- What is Singh particularly bearish on? The pandemic winners. Most of them pulled forward 2-3 years of growth and some services aren’t as relevant today. Not all of the food delivery companies are going to survive.
Disclosure
All investments involve risk, including possible loss of principal.
The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).
