Facebook parent Meta Platforms was probably the least loved megacap tech stock before its slide over its weak first-quarter outlook, but its sheer size meant it was a widely owned holding — according to FactSet, 1,560 funds that have filed 13-F reports for the period ending Dec. 31 held the stock.
The £1 billion ($1.4 billion) LF Blue Whale Growth Fund was one of them — but it says it got out in time, having owned the stock since its inception in 2017. Stephen Yiu, the lead manager of Blue Whale, says the spending on the metaverse led the fund to sell what was a top-10 holding as recently as October. Meta’s FB, -2.10% stock has collapsed by 34% this year.
Unlike Apple AAPL, +1.85% and Google GOOG, +0.20%, Meta Platforms doesn’t have an operating system on which to build a metaverse, and even if it is successful, it could take five years for the investment to pay off. Meanwhile, the core Facebook is being hit by the iOS advertising change and competition from TikTok. What first attracted the fund to Meta Platforms in the first place was its attractive valuation on free cash-flow yield, but that discount to Google’s parent Alphabet is now being eroded.
Yiu isn’t dismissive of the metaverse but he says there are better alternatives, such as graphics chip maker Nvidia NVDA, +1.54%. “We would rather have Nvidia, which is doing quite well outside of the metaverse, and if the metaverse is going to come, it’s going to take a good chunk of that,” he says.
The fund also sold out of PayPal Holdings PYPL, -0.95% before its slide on its cautious outlook and its scrapping of its 2025 user goal of 750 million. Yiu is concerned over its longer-term strategy. He notes the company doesn’t have a clear succession plan on who would succeed 64-year-old CEO Dan Schulman, who has led the company since the spinoff from eBay, and he called the company’s interest in buying Pinterest PINS, +0.83% a distraction. Its move into crypto, ‘buy now, pay later,’ and likely stock-market trading aren’t going to be game-changers but just moves to keep users on the platform, Yiu says, as it fights off competition from Apple Pay, Google Pay and others. “Over the last three to six months, a lot of value has been destroyed,” he says.
So what to buy instead? The fund turned to a financial, the brokerage Charles Schwab SCHW, +1.95%, as a beneficiary from rising interest rates. Yiu says the fund doesn’t invest in any bank because it can never know what’s on its balance sheet. Since over 50% of revenue is derived from the interest on cash balances on account, Schwab benefits from a rising interest-rate environment, and its successful takeover of TD Ameritrade also is a benefit.
More broadly, Yiu says it’s a difficult environment and one where you have to be highly selective. He contrasts a company such as Peloton Interactive PTON, +25.28% — which he says might not exist in a year’s time if it isn’t taken over by Nike or Amazon, given the cash it’s burning — with companies such as Microsoft MSFT, +1.20% and Google. “At the moment, it’s quite chaotic in the market. They look at the headlines from Facebook, PayPal, Netflix and they say, ‘OK, anything that’s tech related, let’s get out.’”
Taken from Tuesday’s release of the National Federation of Independent Business small-business report, this chart shows a turn in labor-market indicators including not having enough qualified applicants for job openings. Given the lagged relationship between job openings and wages, that could spell a slowing in pay growth to come. “Many consumers were sitting on a mountain of cash. Now many aren’t,” says Tom Porcelli, chief U.S. economist at RBC Capital Markets. “Wage gains have been incredibly strong. And now there seems to be some early signs it could start slowing. We think the Fed should tread carefully here.”
Chipotle Mexican Grill CMG, +0.51% shares are due to rally, after the restaurant operator reported stronger-than-forecast fourth-quarter results and set plans to expand in smaller towns where it sees fatter profit margins.
NCR NCR, +3.10% is due to surge, as the point-of-sale software maker said it’s conducting a strategic review.
A cautious outlook pressured shares of ride-sharing company Lyft LYFT, +5.37%. Rival Uber Technologies UBER, +2.13% reports results after the close, as does media and entertainment giant Walt Disney DIS, -0.02%.
The yield on the 10-year Treasury TMUBMUSD10Y, 1.931% slipped to 1.92%.
Here were the most active stock-market tickers as of 6 a.m. Eastern.
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