3 Tech Stocks from the Billionaire Betting Against Elon Musk
We’ve said it often here at Millennial Money: 2020 was weird. On the surface, the S&P 500’s 16% return looks “pedestrian” by recent standards, even trailing the prior year’s return. Don’t be fooled: 2020 was a historic year for investors. In fact, the S&P 500 declined 30% in 22 trading days, the fastest sell-off ever (including the Great Depression).
What happened next was shocking: young investors banded together in chatrooms and powered the stock market back. When the dust had settled, the market surged back and finished greater than 71% higher than the lows established in March.
Unlike Wall Street “suits,” these investors willingly embraced risk and high-growth stocks, sending technology and electric vehicle stocks into stratospheric heights.
This year the S&P 500 is currently on track for even better performance than last year, up nearly 10% through the first half of the year. So naturally, you’d expect last year’s leaders to continue to lead the way forward. And you’d mostly be wrong.
- Tesla is down 17%
- Apple is down 4%.
- Netflix is down 7%.
- Disney is down 5%.
So how is the S&P 500 outperforming these large-cap growth stocks? The financial media, in desperate need of a narrative, has dubbed this a rotation from “stay-at-home” to “reopening stocks” but the truth is simpler: a shift from growth to value investing as industries like energy, industrials, and materials are leading the way in 2021.
Value investing has underperformed growth for the greater part of a decade, to the point where famous value investor Ted Aronson closed his fund, sending his investors $10 billion of assets while telling them “our recent performance sucks.” Ouch!
Meet Michael Burry: The Billionaire Betting Against Elon Musk
Very few investors were anticipating a return to value stocks in an environment where the economy expanded at rates unseen in decades. However, value investor Michael Burry is no ordinary investor. In fact, he also predicted the most consequential change in the financial system in the last 50 years.
If the name sounds vaguely familiar, you might know him from Michael Lewis’s book The Big Short (later adapted for the silver screen). Short version: Burry became increasingly worried about the subprime housing market in 2005, leading him to eventually short the mortgage market and make nearly a billion dollars for his fund.
Afterward, Burry went underground before raising his profile over the last year, first by being an early investor in GameStop stock (before the tremendous run-up, back when it could be classified as value stock) then by issuing warnings about the increased frothiness in growth stocks.
Tesla Motors was of interest to Burry, partially based on the back of an amazing 734% return in 2020. Burry’s family office, Scion Asset Management, went on to short Tesla stock. It’s early, but it appears Burry is making money on his Tesla short. Today Burry is short 800,100 shares (or about $530 million) worth of Tesla’s stock.
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3 Tech Value Stocks Michael Burry has Gone “Long” On
That said, the Musk-versus-Burry story might be a sideshow. The truth is Burry is a great value investor and it pays to know what he’s thinking. To ensure we’re not missing any hidden value, we looked through his holdings to see if there were any stocks we agreed with.
1.) Facebook (Nasdaq: FB)
Price: $336.77 (as of close Jun 14, 2021)
Market Cap: 954,899,492,146
Forward P/E: 26 times
We get it: it’s slightly surprising to see Facebook referred to as a value stock but that’s the genius behind Burry’s $162 million investment. The key to value investing is it’s inherently contrarian, finding value in investments the stock market is overlooking.
Using that framework, it’s easy to see why, despite being a $900 billion company, there are reasons to believe the market is still not fully pricing in Facebook’s potential.
Much of this disconnect comes from the company’s lackluster executive leadership. Through a series of mismanaged crises, Facebook has angered lawmakers across both sides of the aisle, nearly the entire media industry, and even fellow big tech cohorts like Apple. Excluding the latter, it’s unlikely these stakeholders will be able to hurt Facebook’s growth.
Admittedly, there are risks with Facebook stock. One recent risk has been a change in Apple’s iOS update, which prohibits the amount of tracking that apps like Facebook can perform on users browsing other apps and websites, commonly referred to as third-party tracking.
Despite Facebook’s hyperbolic warnings that it could make ads less relevant and hurt small business, Apple’s update also increases the value of first-party data. Except for possibly Alphabet’s Google (see below), there’s no company with more first-party data on its user base than Facebook.
To say Facebook underperformed its tech peers last year would be an understatement; the stock posted 33% returns in 2020. On the surface, this might appear like an amazing return, but Facebook underperformed most of the FAANG cohort (save for Alphabet). However, the company continued to post top-line growth of 22% in a harsh environment for advertising stocks.
Look for the company’s top-line growth to accelerate. Analysts expect Facebook will post 35% revenue growth this fiscal year. Despite this strong top-line growth, shares continue to be priced at a minuscule premium of the greater S&P 500 on forward earnings multiple, 26 times versus 22.6 times.
And therein lies the value. As a comparison, the S&P 500 is posting year-over-year revenue growth of 7%. To hammer this point home, Facebook is expected to grow nearly 5 times of the greater S&P 500, yet trades nearly on par on an earnings basis. As a result, Facebook trades at a PEG Ratio (PE/expected growth) of 1.05 (1.0 is generally considered value).
2.) Lumen Technologies (NYSE: LUMN)
Price: $14.85 (as of close Jun 14, 2021)
Market Cap: 16,413,891,189
Forward P/E: 9 times
Facebook is nothing without internet connectivity, so it’s understandable why Burry is interested in internet providers, particularly as these large asset companies tend to be priced less than the overall market. However, Burry’s investment in Lumen Technologies can best be classified as “deep value” because the stock is one of the few companies that has a sell/underperform analyst rating.
Investors have two major concerns. First, the company is currently dependent upon revenue from landline telephony, which is shrinking. And second, the stock, then named CenturyLink, was a high-yield darling until the company sliced payouts by more than 50% in 2019, drawing the ire of income investors.
Current CEO Jeff Story is attempting to transition the company from landline telephony to high-speed fiber and edge-computing. Even he would admit this has been a difficult turnaround, but the seeds appear to be taking root.
Despite the universal loathing among Wall Street analysts, the stock has been a strong performer this year. Shares are currently up 45% year-to-date and that’s on top of the massive dividend yield of 7%.
Even after the run-up, shares continue to be comparatively priced for a worst-case scenario, trading for less than one time revenue and only nine times forward earnings versus the S&P 500 that trades at 3 and 22.6 times, respectively.
The biggest risk to Lumen is the company will have to cut its dividend again. Just this week, AT&T announced it was spinning off its media holdings and, as a result, was cutting its outsized dividend. Shares tumbled more than 10% when the full plan was disclosed as many income investors dumped the stock.
Lumen appears to have no problems managing the dividend with the current free-cash flow payout ratio of approximately 40%. Additionally, the company is working to refinance its debt pile and use the interest savings to pay off debt. It appears Burry believes the company can continue paying that massive dividend and I tend to agree.
3.) Alphabet (Nasdaq: GOOG; GOOGL)
Price: $2448.91 (as of close Jun 14, 2021)
Market Cap: 1,666,452,119,793
Forward P/E: 30 times
It’s rare that growth investors and value investors have many stocks in common. That’s why Millennial Money was pleasantly surprised when we found that Michael Burry had a $165 million position in Alphabet. Upon deeper review, it makes sense, as many investors misunderstand Alphabet’s unique value proposition.
Yes, Alphabet makes revenue by selling digital advertising through its Google subsidiary, but its value is multiples of that of a digital marketer. In fact, there’s no company more influential in the knowledge discovery process than Alphabet. Every day, Alphabet’s host of sites process billions of queries across the globe, providing users answers and data in milliseconds.
Here’s where the value aspect comes into clear focus: Alphabet underperformed every other stock in the FAANG cohort in 2020 by advancing only 31%. The problem was that advertising took a significant blow that year and revenue only increased by 13% in 2020. Shares have continued to climb this year, up nearly 30%.
Still, after the run-up and the fact the company is valued at more than $1 trillion, there’s an argument that Alphabet is a value stock. First, Alphabet only trades at a forward price-to-earnings ratio of 30 times and a PEG ratio of 1.42. Although these metrics are higher than other value stocks, the company is undervalued when considering the opportunity for further growth.
In fact, analysts expect Alphabet to post growth of 30% this year, but even that could be understating its growth potential. Alphabet’s core advertising business will likely surprise to the upside post-pandemic as heavy digital advertisers like the leisure industry are in an all-out war to take advantage of pent-up wanderlust.
For longer-tailed growth from its Google advertising division, the digital format is stealing significant dollars from other advertising formats—mainly print and television spend. The common refrain is “dollars follow eyeballs” and Americans continue to shift away from television and print media to consume news and entertainment on their mobile devices.
Finally, there’s opportunity in the company’s Other Bets section. Google became a subsidiary of parent company Alphabet in 2015, and the aim was to become a platform company and to create or invest in startups.
The financial performance of Other Bets has been disappointing, losing more than $20 billion in the last six years, and has prompted considerable handwringing from Wall Street investors.
More recently, CFO Ruth Porat has been ensuring they cut wasteful programs from their stable like the Loon helium balloon project and even monetizing their self-driving Waymo project by allowing outside investors to take a minority stake.
However, there have been a few notable breakthroughs: Alphabet’s autonomous vehicle technology company Waymo made headlines in October when it was announced they were going fully autonomous in Phoenix. Meanwhile, its life sciences division Verily collaborated with Stanford and Duke to design a COVID-19 testing triage site.
At the end of the day, Alphabet is one of the most straightforward ways to bet on the biggest trends in the world. If you’re an investor who thinks companies like Alphabet are simply too big to offer compelling returns in the future, we think it’s time to take another look!
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