In this article, we discuss the 10 biggest losers of the technology stocks crash.
Inflation and a looming rise in interest rates has pushed investors towards value offerings in recent weeks. This shift has come at the cost of growth stocks in the technology sector that are crashing even as they report stellar earnings. Some of the technology companies that have registered a dramatic drop in share price over the past few weeks include PayPal Holdings, Inc. (NASDAQ:PYPL), Meta Platforms, Inc. (NASDAQ:FB), and Shopify Inc. (NYSE:SHOP), among others discussed in detail below.
Major indexes are also down since the beginning of the year. These indexes had grown growth-heavy in the past few years amid a massive surge of tech-related spending in the market, accelerating to record highs during the pandemic. The S&P 500, dominated by five big technology companies, is down close to 9% year-to-date. The NASDAQ Composite is down nearly 14%. These declines have come even before the Fed has raised interest rates, indicating that there is a larger correction to come when the rates do rise.
Morgan Stanley analyst Michael Wilson believes that the major indexes could register even steeper declines unless a slowdown in inflation or “some sort of catalyst” curbs the market sell-off of technology stocks. However, Goldman Sachs expects inflation to remain at high levels in the coming months. Furthermore, analyst David Kostin told investors in a research note in January that a disappointing start to the earnings season spelled more trouble for stocks, especially those that operate in the more speculative parts of the market.
Pixabay/Public domain
Our Methodology
The companies that operate in the technology sector and have registered a more than 10% decline in share price over the past month were selected for the list. Data from the more than 900 elite hedge funds tracked by Insider Monkey that filed 13Fs for the December 31 reporting period was used to identify the number of hedge funds that hold stakes in each firm.
Technology Stocks Crash: Biggest Losers
10. DraftKings Inc. (NASDAQ:DKNG)
Number of Hedge Fund Holders: 34
Percentage Decline in Share Price Over Past Month: 11%
DraftKings Inc. (NASDAQ:DKNG) is a digital sports and entertainment company. Hedge funds doubled down on the stock in Q4 even as the share price continued to crater. DKNG shares have now lost 70% of their value since early September. At the end of the fourth quarter of 2021, 34 hedge funds in the database of Insider Monkey held stakes worth $1.30 billion in DraftKings Inc., up from 28 positions in the preceding quarter worth $1.32 billion.
On February 22, Wells Fargo analyst Daniel Politzer downgraded DraftKings Inc. stock to ‘Equal Weight’ from ‘Overweight’ and revised the price target down to $19 from $41, noting there was concern around the growing operating expenses of the firm and their impact on the company’s path to profitability.
Just like PayPal Holdings, Inc., Meta Platforms, Inc., and Shopify Inc., DraftKings Inc. is one of the growth stocks feeling the heat of an economic slowdown.
In its Q2 2021 investor letter, Alger, an asset management firm, highlighted a few stocks and DraftKings Inc. was one of them. Here is what the fund said:
“DraftKings Inc. is an online gaming operator. Its legacy Daily Fantasy Sports (DFS) allows users to virtually draft teams of players from professional sports leagues and potentially earn a payout based on how athletes perform. DraftKings Inc. Online Sports Betting (OSB) involves the company taking wagers or bets from customers on sporting events. The company’s third offering, Online Casino (iGaming), involves customers betting real money when playing casino games like slots and blackjack online.
DFS is legal in most states, while approximately 25% of the country’s population has access to OSB and approximately 10% has access to iGaming. Within a year, we expect approximately 40% or more of the population to have access to OSB as legalization moves rapidly.
DraftKings Inc. reported a strong quarter, with revenues exceeding expectations by more than 30%. We think the stock underperformed due to the time period between the conclusion of March Madness and the start of the NFL season being a weaker betting period and concerns about more intense competition. Concerns around tough comps have also hindered performance of DraftKings shares. We note that monthly state data continues to be robust, showing no signs of slowing from reopening. We also believe DraftKings Inc. is increasing its potential to gain market share by moving its tech-platform to SBTech, which is a sports betting platform the company acquired as part of a SPAC deal. Legalization of sports betting by states has also been robust.”
9. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders: 94
Percentage Decline in Share Price Over Past Month: 11%
Adobe Inc. (NASDAQ:ADBE) is a diversified software firm. On January 4, UBS analyst Karl Keirstead downgraded the stock to ‘Neutral’ from ‘Buy’ and lowered the price target on it to $575 from $635, noting that there was growing concern that tech-related spending would hinder the growth of the company in 2022.
The hedge fund sentiment around Adobe Inc. remains mixed. At the end of the fourth quarter of 2021, 94 hedge funds in the database of Insider Monkey held stakes worth $10.4 billion in Adobe Inc., compared to 95 positions in the previous quarter worth $12.6 billion.
Here is what Palm Capital had to say about Adobe Inc. in its Q1 2021 investor letter:
“Adobe Inc. has a near-monopoly in content creation software with dominant applications including Photoshop, Lightroom and Illustrator that are critical in the lives of creative professionals. These applications are not only the best in the industry but also have high switching costs as it takes designers many years to become adept at using them. This investment of time is a sunk cost and makes it costly for designers to switch to an alternative. Additionally, as most creative professionals use Adobe’s suite of products it also has a network effect advantage – creative professionals use it because most other creative professionals do.
This creates stickiness of revenue, the visibility of which is enhanced by the fact that more than 90% of Adobe’s overall revenue is subscription-based and a large portion of this is paid in advance.
As Adobe’s programs have already been developed and they are now largely distributing this over the internet, the company’s gross profit margins are a towering 85%.
Adobe Inc. also has great economics. It is capital light. This means that it does not need physical assets like machinery, property, or stock to operate. As its assets are intangible, it does not need to take on debt to finance them. And its marginal cost of serving additional customers is minimal. The company is highly cash generative, not only because some of its revenue is received upfront, but also because it pays a large portion of salaries with shares and share options. This is evident from its balance sheet – it has had a large net cash position for seven of the past ten years. Furthermore, investments in its intangible assets are expensed rather than capitalized resulting in a low tax burden relative to typical capital-intensive businesses.
Finally, Adobe Inc. has lots of room for growth. The shift to digital creates a strong underpin for demand growth over the long term. And Adobe’s switching costs give it the power to grow revenue by increasing prices. Additionally, the subscription model is growing Adobe’s market in several ways. Firstly, it makes it affordable for small businesses, opening a new market to Adobe. Secondly, by freeing up IT capex and fixed costs, the model also makes it more affordable for large businesses, incentivizing them to take on pricier options. Thirdly, as the company is not updating its products that were sold under the licence model, the subscription model is beginning to capture many non-compliant users.
Over the next ten years, we expect Adobe’s sales to more than double and its free cashflow margin to expand to almost 40%.
These characteristics make Adobe Inc. an exceptional business and it is one half of the reason we have been invested for nearly three years.
This example as well as our examples of the aggregators earlier illustrates the impact that the internet has had in not only creating more profitable, less capital-intense businesses but also in allowing businesses to grow to much larger sizes at a much faster pace than before. It partly explains the pace with which new businesses are reaching $100bn valuations whether on public or private markets.”
8. Sprout Social, Inc. (NASDAQ:SPT)
Number of Hedge Fund Holders: 31
Percentage Decline in Share Price Over Past Month: 12%
Sprout Social, Inc. (NASDAQ:SPT) provides web-based social media management tools. Top hedge funds hold large stakes in the company. Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Zevenbergen Capital Investments is a leading shareholder in Sprout Social, Inc. with 1.2 million shares worth more than $113 million as of December 31.
On January 12, Barclays analyst Raimo Lenschow lowered the projected price target on Sprout Social, Inc. to $92 from $162 but kept an ‘Overweight’ rating on the shares, highlighting that the valuation levels for the software sector were trending towards long-term averages rather than recent highs.
In its Q2 2021 investor letter, asset management firm ClearBridge Investments highlighted Sprout Social, Inc. among its commentary. Here is what the fund said:
“Sprout Social, Inc. (is one of the) companies that have become go-to platforms for small and medium size businesses (SMBs) engaged in e-commerce and social media marketing, rebounded strongly in the quarter after being caught in the selloff among high-multiple growth names since Vaccine Monday. These and the portfolio’s other disruptors had thrived through the first part of the pandemic, leading us to trim positions into strength and reallocate cash into more attractively priced evolving opportunities and steady compounders that had been overly punished by lockdowns and a drop in economic activity.”
7. Intel Corporation (NASDAQ:INTC)
Number of Hedge Fund Holders: 72
Percentage Decline in Share Price Over Past Month: 13%
Intel Corporation (NASDAQ:INTC) makes and sells computer products and technologies. At an Investor Day conference recently, the company outlined that it was investing in new factories and technologies to meet rising chip demand, resulting in lower profit margins guidance for 2022. However, the company said it expected the margins to climb from 2025 onwards.
Hedge funds have been piling into Intel Corporation in recent months. At the end of the fourth quarter of 2021, 72 hedge funds in the database of Insider Monkey held stakes worth $5.5 billion in Intel Corporation, compared to 66 funds long the stock a quarter earlier, though those positions were worth nearly $1 billion more at $6.4 billion.
6. Resideo Technologies, Inc. (NYSE:REZI)
Number of Hedge Fund Holders: 24
Percentage Decline in Share Price Over Past Month: 14%
Closing out the first half of the list is Resideo Technologies, Inc. (NYSE:REZI), which develops and sells hi-tech thermal and security solutions to the commercial and residential markets. Major hedge funds are bullish on the stock. Among the hedge funds being tracked by Insider Monkey, New York-based firm Praesidium Investment Management Company is a leading shareholder in Resideo Technologies, Inc. with 6.8 million shares worth more than $177 million as of the end of 2021.
Resideo Technologies, Inc. posted its financial results for the fourth quarter on February 15, reporting earnings per share of $0.44, beating estimates by $0.07. On the other hand, the company’s revenue of $1.4 billion missed expectations by $20 million.
In addition to PayPal Holdings, Inc., Meta Platforms, Inc., and Shopify Inc., Resideo Technologies, Inc. is one of the growth stocks that has clearly been affected by the rise of inflation.
5. Sea Limited (NYSE:SE)
Number of Hedge Fund Holders: 108
Percentage Decline in Share Price Over Past Month: 17%
Sea Limited (NYSE:SE) is a diversified technology company that hedge funds have been selling in recent months. At the end of the fourth quarter of 2021, 108 hedge funds in the database of Insider Monkey held stakes worth $10 billion in Sea Limited, down from 117 in the previous quarter, when those positions were valued at $14 billion.
On January 27, Goldman Sachs analyst Miang Chuen Koh downgraded Sea Limited to ‘Buy’ from ‘Conviction Buy’ and reduced the firm’s price target on the stock to $300 from $460, noting that the near-term visibility for the firm was challenging.
In its Q4 2020 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Sea Limited was one of them. Here is what the fund said:
“Sea Limited: When I wrote our Q4 2019 letter about Shopee launching a Brazilian business, it seemed very few investors or competitors knew or cared.
A year ago, I wrote: “This is the first test for the ecommerce marketplace outside of its Southeast Asia home base. Will the platform’s fun and addicting features overcome a lack of local knowledge and presence? It’s hard to predict consumer behavior and how accepting users will be to a platform – especially one that’s a foreign culture and 10,000 miles away. The only way to know is to experiment and watch the results closely.
Empirically though, it seems that what consumers find entertaining in Asia, generally translates well to Brazil (and Shopee really is as much an entertainment platform, as an ecommerce one).
For example, just look at the top 10 free apps in Brazil. Two are utility messaging apps, so we’ll ignore those (WhatsApp and
Facebook Messenger). But among the remaining eight apps, they’re all entertainment based and overwhelmingly Asian. Four are from China (Kwai, TikTok, VStatus, TikTok Lite), two from Singapore (Free Fire and Shopee, both Sea Ltd apps), and one from the US (Instagram). The commonality is that all these apps are experts at creating addictive habits, as evidenced by their personalized recommendations, avg usage time, number of logins per day per user, etc.” (LINK)
I distinctly remember having conversations with several Brazilian hedge funds as recently as last summer who were investors in Sea Limited. When the topic of Brazil came up, many of them didn’t even know Shopee was operating in their own backyard!
Part of this stems from the fact that Shopee..”[read the entire letter here]
4. Palantir Technologies Inc. (NYSE:PLTR)
Number of Hedge Fund Holders: 33
Percentage Decline in Share Price Over Past Month: 18%
Palantir Technologies Inc. (NYSE:PLTR) develops software products for the intelligence industry. On February 18, Deutsche Bank analyst Brad Zelnick maintained a ‘Hold’ rating on the shares and lowered his price target on them to $15 from $18, pointing out that the company’s aggressive investment plans to sustain its growth and the firm’s underlying organic trends were a cause for investor concern.
Hedge funds have also been selling Palantir Technologies Inc. as the market shifts towards value plays. At the end of the fourth quarter of 2021, 33 hedge funds in the database of Insider Monkey held stakes worth $1.2 billion in Palantir Technologies Inc., compared to 35 in the preceding quarter with stakes worth $1.6 billion.
In its Q4 2020 investor letter, asset management firm Guardian Fund highlighted a few stocks and Palantir Technologies Inc. was one of them. Here is what the fund said:
“In October, we bought a stake in Palantir. Earlier, in June, our concentrated Tech Fund, which has a mandate to also buy shares in the secondary market, bought shares of Palantir from insiders, before the direct listing. At the price we bought, the equity had much more upside than downside. Palantir is operating a software platform that functions as the digital infrastructure for data-driven operations and decision making. The software helps to structure and capture context in data of large corporations. Governments are increasingly realizing that they have to deal with serious data challenges and cyber risk. As most governments cannot attract the most talented software engineers, they need private enterprises such as Palantir to help them build solid infrastructure. Foundry, Palantir’s software for enterprises, is used by companiesto make safer cars and airplanes or to accelerate cancer research. The speed to bring new clients on board is improving and revenues will grow faster than expenses. Palantir has a long runway of growth ahead.”
3. Shopify Inc. (NYSE:SHOP)
Number of Hedge Fund Holders: 86
Percentage Decline in Share Price Over Past Month: 25%
Shopify Inc. is one of the top ecommerce stocks on Wall Street, but that hasn’t saved its shares from losing a quarter of their value over the past month. Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm Lone Pine Capital is a leading shareholder in Shopify Inc. as of December 31, owning 1.3 million shares worth more than $1.9 billion.
On February 17, Roth Capital analyst Darren Aftahi downgraded Shopify Inc. to ‘Neutral’ from ‘Buy’ and lowered the price target on SHOP shares to $850 from $1,400, noting that the company’s plans for international expansion might negatively impact its margins in the near-term.
In its Q4 2020 investor letter, RGA Investment Advisors, an asset management firm, highlighted a few stocks and Shopify Inc. was one of them. Here is what the fund said:
“While we are pleased with the results of these specific purchases, we made a huge mistake of omission at that time. This mistake will likely be one of the biggest we ever make in our careers. Specifically, we did deep work on Shopify Inc. and loved everything about the business qualitatively. Unfortunately, we ultimately found ourselves unable to get comfortable with the numbers.
We built our model up from the key performance indicators (KPIs) that drive revenues. Our last save of the model dated 8/3/2016 looked as follows: (Page 2). These numbers seemed right from everything we understood about the company. While we tend not to rely on sell-side consensus estimates before finishing our own workup of the business, we do give them a look once we feel comfortable with how we have approached our analysis as it is often helpful to get a sense of what the average participant in the market expects the business to do. With Shopify, the sell-side consensus was so far from where our numbers were shaking out, it seemed almost impossible that we were basing our analysis on the same underlying information. Our natural next step was thus to take the sell-side consensus data and work backwards to figure out the implied expectations on each of the key revenue drivers. Here is what the sell-side consensus looked like as at the time: (Page 2).
Shopify’s actual revenues for 2016-2018 ended up being $389m, $673m and $1,073m. In other words, not only were we justifiably far more optimistic than the consensus estimate, but we also were far too conservative in terms of how the company actually performed.
The nature of our job as securities analysts is to take calculated risks, in an uncertain world where the “true” answer is inherently unknowable before the fact. We operate in what many call an “efficient market” and subscribe to the belief that for the most part, markets are generally pretty efficient and it requires differentiated analysis to find a return above what the market can offer. So why did we pass on Shopify Inc. despite 1) deeply believing in the qualitative elements of the business; and, 2) seeing a meaningful gap between what we expected and the consensus expected? The answer is unfortunate but simple: we lacked confidence in ourselves. It was the first time we truly experienced such a stark divergence between our expectation and the consensus and the result was the inclination was to pound ourselves over the head with how dumb we must be, rather than the other way around. We also learned that the truly great companies use their strong business advantages, smart management and execution to raise the bar every step along the way. Obviously this is a cycle which cannot continue ad infinitum, but especially in instances where our qualitative work identifies the inherent strengths in the business and the numbers shake out to be quite fair, the consistent “raising of the bar” can be a potent driver for the stock.
Please do not judge us too harshly for our mistake on Shopify Inc., for we have from the very beginning made one commitment above all else to both our clients and ourselves: that we will be better today than we were yesterday, and better tomorrow than we are today. While this mistake was quite costly, it ended up being a key confidence and process builder.”
2. Meta Platforms, Inc. (NASDAQ:FB)
Number of Hedge Fund Holders: 224
Percentage Decline in Share Price Over Past Month: 32%
Meta Platforms, Inc. is the parent company of social media giants Facebook and Instagram, and also provides interactive media and other services. On February 8, investment advisory KGI Securities downgraded the stock to ‘Neutral’ from ‘Outperform’ along with a price target of $270. Analyst Freddy Chen issued the ratings update.
There was also a notewrothy hedge fund exodus from Meta Platforms, Inc. in Q4. At the end of the fourth quarter of 2021, 224 hedge funds in the database of Insider Monkey held stakes worth $31 billion in Meta Platforms, Inc., compared to 248 positions in the preceding quarter worth $38 billion.
In its Q1 2021 investor letter, ClearBridge Investments discussed Meta Platforms, Inc., noting that it increased its position in the stock during that quarter. Here is what the fund said:
“We continued to keep our learnings from 2020 in mind during the quarter as we sought to increase the up capture of the portfolio. We also made adjustments to the portfolio’s top 10 holdings to increase the participation of select stocks, including Meta Platforms, Inc., while trimming our weighting to stable names, which now represent 47% of the portfolio. Our repositioning has been encouraging so far with the portfolio performing better on up days in the market while maintaining good down capture during more turbulent sessions.”
1. PayPal Holdings, Inc. (NASDAQ:PYPL)
Number of Hedge Fund Holders: 110
Percentage Decline in Share Price Over Past Month: 36%
Topping the list is payments technology company PayPal Holdings, Inc., shares of which have crashed by 36% over the past month. Several hedge funds timed their exits from the stock well in Q4, as at the end of the fourth quarter of 2021, 110 hedge funds in the database of Insider Monkey held stakes worth $9.9 billion in PayPal Holdings, Inc.. That was down from 123 long positions in the preceding quarter which were worth $12.8 billion.
On February 3, Needham analyst Christopher Brendler lowered the firm’s price target on PayPal Holdings, Inc. to $166 from $275 but kept a ‘Buy’ rating on the stock, noting the firm was a big pandemic winner but now faced brutal competition highlighted by the loss of eBay, one of its largest customers, in addition to facing broader economic concerns.
In its Q4 2020 investor letter, Polen Capital Management discussed PayPal Holdings, Inc., having this to say about the company:
“For the full year 2020, one of the top performers was PayPal, which we purchased in 2019, the company continues to take market share in digital payments and has seen an acceleration in user adoption and engagement, especially within their “silver tech” or older user demographic. We expect many more years of ongoing double-digit growth from their various business segments and new initiatives.”
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This article is originally published at Insider Monkey.
