The Big Tech Short: for how long can investors win on big losses?

Here’s what you need to know this week:

• Affairs of state: The Big Tech Short: for how long can investors win on big losses?

State-by-state:

• Apple hosted WWDC22
• Microsoft seized more domains from hackers
• Meta’s Sheryl Sandberg departed office
• Google and Russia’s Great Firewall
• Amazon split its stock
• Tencent is part of China’s growth woes

For decades, the tech states have been benefiting from easily accessible finance. 

The Silicon Valley investment mentality was: “get enough seed money to the right minds to develop the right technology”. The easy cash that flowed to companies like Facebook and Google fuelled the creation of the world’s biggest digital platforms. 

It also put billions in the pockets of an elite of the global technology sector, allowing them to build the empires that we see today – the tech states. 

What’s changed? We may now be seeing those empires fall – or at least significantly downsize. Billions of dollars in investor value have been erased since the beginning of the year with the five biggest technology stocks on the market dropping by nearly $2.6 trillion in combined value. 

Antitrust legislation is also threatening the tech states in all major markets. The UK’s Online Safety Bill, the EU’s Digital Markets & Services Act, The US American Innovation and Online Choice Act, not to mention the ongoing crackdown by Chinese state regulators against tech states there, all pose the same threat: breaking up their monopolistic positions. 

Brad Stone, author of Amazon Unbound, notes that the “years of wildly inflated valuations, crypto-flavoured pyramid schemes, and all manner of naked opportunism” inflated the bubble. In the wider economy, high interest rates and inflation alongside the conflict in Ukraine have helped burst it, leading to the “Bust of 2022”

For many investors, it seems like an unambiguous disaster. For some short sellers, those that saw this coming, the “schadenfreude” is setting in. Schadenfreude; the pleasure that someone derives from another person’s misfortune. The pleasure of the big tech short.

Who’s losing? Masayoshi Son’s SoftBank posted a record loss of $27 billion as technology stocks, on which he has been historically bullish, began to plummet. Speaking at the Tortoise Responsible AI Forum, he told us that he remains confident in the long term outlook for the world’s tech sector; speaking about the bust of 2000, he said “the number of users on the internet never got depressed… only the stock crashed. It’s like the shadow of a person in the daytime, in the afternoon the length of the shadow changes, but the height of the person never changes.”

Tiger Global, the US investment management firm, has also suffered huge losses. It has posted $17 billion in losses in the year to date. Tiger was heavily invested in technology stocks and saw years worth of gains in the sector erased in a few months. Tiger’s losses eclipsed the most significant hedge fund losses in history, including Melvin Capital’s $7 billion slump during the GameStop trading frenzy.

Who’s winning? CQS, a London-based hedge fund, was positioned for a big sell-off in growth stocks like Meta. Investment documents seen by the FT suggest that The fund’s manager Sir Michael Hintze won big on a bet that Nasdaq – including Amazon and Microsoft – would slump relative to other indices.

Crispin Odey’s $7 billion fund has been shorting big tech. “Bigger tech stocks, such as Google, have fared better because they are monopolies. But governments are now starting to look at these things.” “People don’t realise how far these things can fall”. Amazon is down 36 per cent, Meta 45 per cent. Other big tech stocks like Tesla, Zoom and Shopify have sustained massive losses. 

Notorious short-seller Jim Chanos of Kynikos Associates, told Insider that the companies crumbling in the current tech bust are a big slice of the economy. “We call this the dot-com era on steroids”. “Any investor right now should really be scrutinising, particularly in the tech area, where businesses are slowing down in terms of revenue growth and the companies are still unprofitable.”

What now? Meta, Microsoft, Google and Apple have rewarded their executives with more pay and hired more engineers, in effect they are able to say “forget the economy, they can invest through the cycle”. It looks like business as usual.

The cash hasn’t dried up, and the stock market panic doesn’t change the internal value of the companies argues Tripp Mickle. They “have tight control of some of the world’s most lucrative businesses: social media, premium smartphones, e-commerce, cloud computing and search.”

The tech states may be set to surge back after the twilight of this bust. Even if there is a new dawn, the shorters can still win during the downturn. “The magnitude of the losses is breathtaking” said Andrew Beer at Dynamic Beta.“This shows how even the most talented and plugged-in tech investors failed to see the train coming down the tracks.”

In an interview, Beer told us “these companies have done something phenomenal for the world. They have all the talent. It’s hard to bet long-term against them, and no one has proven they are betting the farm. You’re dancing on the end of a pin to get that right on the short sell side”.

Apple is holding its Worldwide Developers Conference. The annual event has seen Apple show off its latest and greatest innovations. In 2022, the focus is on a powerful new M2 chip, which is the basis for the redesigned MacBook Air, and MacBook Pro’s lofty performance benchmarks. On the software side, Apple was touting its Apple Developer Center, and new features for iOS including recalling sent messages. Users will soon be able to edit and retract messages they’ve sent in iMessage. Apple also announced a buy now, pay later option: Apple Pay Later. The conference concludes on 10 June.

New court filings show that Microsoft has seized domains from an Iranian hacking group. Amy Hogan-Burney, the head of Microsoft’s Digital Crimes Unit, announced that Microsoft had obtained permission to seize 41 domains being used by a group code-named “Bohrium”, which had targeted technology, transport, schools and government infrastructure around the world, including the Middle East and India. Bohrium had relied on sending malware, in phishing emails made to look like they were from recruitment agents. This is the latest in a string of domain seizures that Microsoft have used to disable hacking groups. In April, 65 domains were recovered from ZLoader hackers, before that, Microsoft took over more than 100 domains controlled by the Russian group, Strontium.

Sheryl Sandberg leaves Meta. Sandberg had been at Facebook since 2008. She played a critical role in its meteoric rise; coming from a top business job at Google, giving the young company a credibility that it lacked in its early years. But, as Casey Newton writes in Platformer, “2016 on, looked very different… Facebook would find itself suddenly and permanently on the defensive. Each month seemed to bring a fresh scandal: revelations about data privacy problems; the spread of hate speech and links to genocide; abuse by state-sponsored hackers and trolls; spiraling investigations by the Federal Trade Commission, state attorneys general, and countless other regulators around the world.” Sandberg’s role diminished, and last year the Wall Street Journal, using leaked documents, reported that the share of employees answering to her had shrunk significantly. She ended up in a role focused on overseeing the company’s efforts to encourage small businesses to use Facebook’s ad tools. In a 1,532-word Facebook post on 2 June, she said she’d leave her day-to-day duties some time in the fall, while remaining on the company’s board. Shares in Meta Platforms climbed 5.4 per cent Thursday, after the announcement.

Google’s relationship with Russia is strained to breaking point. Back in 2021, there were 91 million users of Google’s YouTube in Russia, many preferred Google Search results to those provided by the domestic rival, Yandex. Since the invasion of Ukraine many Russians have also turned to Google Meet as Microsoft Teams suspended their services. Yet, Google’s once great edifice in Russia is beginning to crumble. In March, Google suspended ads and then paid-for-services like YouTube movies, due to sanctions disruption. Last month, Google’s main Russian bank account was frozen, and its main subsidiary in Russia filed for bankruptcy. The extraction of Google could see the last crack in Russia’s Great Firewall closed up. Do read this brilliant report for Wired to learn more. 

Amazon has executed a stock split. The price of an Amazon share was $2,447 at the end of last week. This week it’s down to around $125. Not because the company’s performance woes have led to a 95 per cent tumble, but because the tech state executed a “20-for-1 stock split”. The reason: splitting individual Amazon shares into many smaller shares allows investors “more flexibility in how they manage their equity in Amazon” according to the company’s shareholder statement. Typically, a stock split is a good sign, because it suggests that the price of a single share has become too high for average retail investors to afford. The Bank of America Research Investment Committee found that stocks often outperform their index over the 12 months following a stock split. So, this might be a positive for Amazon. 

Growth in the US may outstrip China’s figure for the first time in 40 years. Beijing officials have triggered an historic slowdown in the earnings of China’s technology sector through a years-long programme of regulation and restriction. Tencent – and its rival Alibaba – have posted virtually no growth this year, and both have begun to fire staff and contract investment in other sectors. The combination of coronavirus lockdown, and a stagnant digital economy could see China’s GDP grow by just 2 per cent in 2022, which would mean it comes in under the US rate for the first time since 1976, according to estimates by Bloomberg. Would such a disparity be enough to prompt Beijing to loosen the noose on its tech companies?

Thanks for reading,

Luke Gbedemah
@LukeGbedemah

Sebastian Hervas-Jones