- Tech hedge fund Coatue cut its exposure during the market route and is sitting on a giant cash pile.
- The fund assembled a list of stocks that have fallen victim to indiscriminate selling, it told investors.
- But before it buys, it believes market prices need to fall further — potentially another 20%.
Tech-focused hedge fund Coatue Management is sitting on a giant pile of cash, and it’s devising ways to deploy it as it waits for signals that the market is stabilizing.
As Insider previously reported, founder Philippe Laffont is fond of slashing exposure during times of market stress, and the recent stock slump has been no different: The fund told investors in mid-May it had liquidated most of its holdings and was siting on more than 80% cash.
The fund, which started the year managing $59 billion in assets, has lost 17% in 2022 — a dismal start, but better than the Nasdaq Composite Index, which has fallen 23%, and other marquee Tiger Cubs. Coatue told investors it was nonetheless disappointed it didn’t react quicker to the plummeting fortunes of previously high-flying tech companies.
It may be sitting on cash, but that doesn’t mean it’s sitting idle.
Having managed its downside exposure, Coatue now believes the worst is behind it. Now the fund is identifying which stocks to bet on next — and when to start repurposing that cash pile — to turn its performance around.
According to the fund’s investor presentation, a copy of which was viewed by Insider, Coatue has assembled a shopping list of 40 stocks — a combination of mature tech giants, rapidly growing but already profitable companies, and emerging but unprofitable bets that could skyrocket over the long-term. Coatue did not respond to a request to comment before publication.
The shopping list
In sifting and winnowing its wish list, one strategy Coatue highlighted to investors is identifying those that have fallen victim to indiscriminate selling. Stocks are commonly bought and sold based on correlated factors, and in investors’ mad rush to unload tech exposure, some “babies get thrown out with the bathwater.”
So Coatue is aiming to identify great companies that have been unfairly punished by the market crisis, according to its investor presentation.
It highlighted 13 companies with similar stock dives but diverging fundamental business performance. Insider has emphasized those names in bold below:
- Robinhood and Lemonade, which are down 54% and 52% this year, respectively, have broken business models and little to support their lofty valuations, in Coatue’s analysis. Robinhood has declining users and a 43% revenue slide, while Lemonade is struggling to retain customers and is selling insurance at a loss.
- PayPal, by comparison, has a user base of 430 million that’s growing 10% year-over-year to go along with ebitda (earnings before interest, tax, depreciation, and amortization) margins greater than 20%. Block, the uber-popular Cash App owner, is the largest emerging bank, with 25% gross profit growth and 15% ebitda margins.
- PayPal is down 54% and Block is down 48% this year, on par with Robinhood and Lemonade.
“These market inefficiencies get us excited,” Coatue wrote in its investor presentation.
Other anomalies that have caught the tech fund’s attention (with year-to-date stock performance as of June 7):
- Pinterest (-46%) vs. Snap (-68%): While Pinterest is shedding users in the US, Snap is the “dominant GenZ messaging platform” with more than 20% user growth.
- Wayfair (-72%) vs. Shopify (-72%): Wayfair has declining revenues and faces stiff competition from the likes of Amazon, Williams-Sonoma, and other online retailers. Shopify is profitable and boasts revenue growth in excess of 20%.
- Lyft (-62%) vs. DoorDash (-52%): Lyft remains a distant No. 2 in its field behind Uber and continues to post losses. Doordash is the top player in food delivery, has grown eight-fold since 2019, and is profitable to boot.
- Roku (-60%) vs. Netflix (-67%): Roku — which is US only, relies on advertising revenue, and produces no original content — has thin ebitda margins and was trading at 162-times its projected 2022 earnings. Netflix — which is global, earns subscription revenue, and produces enormous amounts of original content — has 22% ebit (earnings before interest and tax) margins and was trading at 16-times its projected 2022 earnings.
Another type of company Coatue is adding to its wish list is long-term innovation bets. They pose more downside risk, but could also see their valuation soar over the next five years:
- Tesla (-40%): In Coatue’s upside five-year scenario, Tesla could eclipse Apple’s market cap. It sees the company as a dominant, vertically integrated automaker whose stock price jump from roughly $720 today to $2,500.
- Nvidia (-37%): The chipmaker already holds a firm grasp over the artificial intelligence processing market and is poised to capture future growth in autonomous vehicle and metaverse markets. Coatue pegs its five-year valuation upside at $360 a share, up from about $189 a share today.
- Datadog (-34%): The software company provides monitoring and analytics for IT functions, like cloud computing. With cloud infrastructure spending projected to hit $1 trillion by 2030, Coatue sees enormous potential for Datadog. Its upside case is a $230 share price in five years, up from $108 today.
Other companies on Coatue’s top-40 include: Microsoft, Amazon.com, JD.com, and Snowflake.
When to buy?
Coatue isn’t necessarily leaping to buy up any of these stocks imminently, telling investors in May the environment isn’t yet conducive to “aggressive stock picking.”
Major market corrections are notorious for false-dawn rallies — the market lurches upward for a short spell before continuing its long descent. During the Dotcom crash in 2000 to 2001, Coatue notes there were three separate stock rallies in excess of 30% sprinkled into the Nasdaq’s 78% decline. A similar phenomenon played out during the Great
Coatue is guarding against this. It has price targets in mind for each of its wish list companies, but it said in mid-May it believes the market could tank another 20%. That’s assuming a likely “hard landing” economic scenario, featuring sustained inflation, an overreaction from the Fed on rate increases, geopolitical risks, and a contraction of profit margins that are well above the historical trend line.
That means it could potentially be months before Coatue significantly increases exposure to any of these companies and starts putting its cash hoard back to work.