In this article, we discuss the 10 stocks hedge funds are dumping amid the tech selloff in 2022. If you wish to skip our comprehensive review of the latest market situation around tech stocks, go directly to Tech Selloff: Hedge Funds are Dumping These 5 Stocks in 2022.
Investors are offloading growth stocks that don’t do well during times of market uncertainty, and moving their money to safe haven assets as many analysts predict the coming of a recession. The CEO of Goldman Sachs, Lloyd Blankfein recently said that there was a “a very, very high risk factor” that the US economy could head towards a recession, and advised consumers and the bosses of big companies to prepare themselves for a potential crisis.
Inflation in the United States reached a 40-year record high of 8.5% in March, before settling at 8.3% in April. Soaring energy prices have also cut deep into the pockets of consumers across the country. According to official state records filed by 10 major utility companies in New York, approximately 1.3 million households in the state are at least two months behind on their utility bills, amassing a collective debt of more than $1.7 billion. As of February 2022, the cost of natural gas and electricity had gone up 24% and 9% respectively from year-ago figures.
The sell-off in the technology sector reflects the investors’ anxiety within the current macro setup. The tech-heavy Nasdaq composite has slid more than 27% since the start of the year, and major names like Tesla, Inc. (NASDAQ:TSLA), Meta Platforms, Inc. (NASDAQ:FB), and Apple Inc. (NASDAQ:AAPL) have suffered heavy drops in recent months. On May 23, social media firm Snap Inc. (NYSE:SNAP) issued a warning to investors that it would fail to meet its own quarterly targets for revenue and adjusted earnings, stating that “the macroeconomic environment has deteriorated further and faster than anticipated.” This led to a bloodbath on the stock market, as the company shares slumped 43% in a single day on Tuesday, taking down a host of other tech/internet names along with it.
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Our Methodology
We studied the holdings of more than 900 elite hedge funds tracked by Insider Monkey at the close of the first quarter of 2022. We then picked 10 tech stocks in which a minimum of 10 hedge funds exited their positions during the first quarter. For each stock we mention the decline in number of hedge funds having stakes in it as of the end of the first quarter as compared to the previous quarter.
Tech Selloff: Hedge Funds are Dumping These 10 Stocks in 2022
10. Cloudflare, Inc. (NYSE:NET)
Number of Hedge Fund Holders: 44
Decline in Hedge Fund Holders: 11
Cloudflare, Inc. (NYSE:NET) is a cybersecurity firm which deals in the provision of integrated cloud-based security solutions to clients around the world. It has plunged 58.69% so far in the year as of May 25, and 73.97% in the last 6 months.
Jefferies analyst Brent Thill on May 25 maintained a ‘Hold’ rating on Cloudflare, Inc. (NYSE:NET) shares, and lowered the price target to $55 from $75. The analyst has lowered his outlook across 28 software firms in his coverage on the back of economic headwinds and the looming risk of recession. He also warned investors that shares could continue to slide if fundamentals weaken further.
44 hedge funds were seen holding Cloudflare, Inc. (NYSE:NET) shares at the close of the first quarter, down from 55 hedge funds in the previous quarter. D E Shaw held 1.53 million shares of the cybersecurity firm at a value of $186 million, making it the firm’s largest Q1 shareholder.
Cloudflare, Inc.’s (NYSE:NET) EPS for the first quarter beat market estimates by $0.01. It posted revenue of $212.2 million for Q1 2022, signalling a jump of 53.7% from the year-ago quarter and also outperforming estimates by $6.5 million.
Along with Tesla, Inc. (NASDAQ:TSLA), Meta Platforms, Inc. (NASDAQ:FB), and Apple Inc. (NASDAQ:AAPL), Cloudflare, Inc. (NYSE:NET) is one of the tech stocks investors are revolving out of in the current market climate.
9. Smartsheet Inc. (NYSE:SMAR)
Number of Hedge Fund Holders: 45
Decline in Hedge Fund Holders: 14
Smartsheet Inc. (NYSE:SMAR) provides digital work-management solutions which let organizations automate processes and manage projects within a single platform. The stock is down 54.82% in the year to date as of May 25, as compared to the 17.05% decline in the S&P500.
Wells Fargo analyst Michael Turrin on May 18 kept an ‘Overweight’ rating on Smartsheet Inc. (NYSE:SMAR) shares, noting that software valuations have taken an outsized impact as of late owing to rising inflation, interest rate hikes, Russia-Ukraine tensions, and tightening labor markets. All of these factors have also contributed to a tough spend environment and chances of a recession in late-2022/2023, according to the analyst, who lowered his price target on the company shares to $55 from $70. Jefferies analyst Brent Thill on May 23 gave Smartsheet Inc. (NYSE:SMAR) a ‘Buy’ rating and decreased the price target to $50 from $75.
As reported at the end of the first quarter, 45 out of the 912 hedge funds tracked by Insider Monkey reported owning positions in Smartsheet Inc. (NYSE:SMAR), with a combined value of $1.34 billion. This showed decreasing investor confidence in the company over the previous quarter, where a total of 59 hedge funds held $1.92 billion worth of stakes in Smartsheet Inc. (NYSE:SMAR). Its largest Q1 shareholder was North Peak Capital, which held 3.78 million shares of the firm valued at $207.4 million.
Alger, an investment firm, talked about Smartsheet Inc. (NYSE:SMAR) in its Q4 2021 investor letter, and here’s what it said:
“Smartsheet provides a cloud based-based platform for work management that lets employees plan and manage their work using grids, projects, cards and calendars. It enhances enterprise productivity and as such is a Positive Dynamic Change beneficiary of corporate America’s rapid digitization. We believe even as employees return to the office, demand for work management software is persistent and durable. The strong value proposition was evident in Smartsheet’s recent quarter as revenue growth and billings accelerated relative to recent periods driven by an increased mix toward upmarket enterprise level customers. Additionally, management provided guidance for next fiscal year of 37% to 40% billings growth versus a 26% consensus expectation.”
8. Coupa Software Incorporated (NASDAQ:COUP)
Number of Hedge Fund Holders: 46
Decline in Hedge Fund Holders: 13
Coupa Software Incorporated (NASDAQ:COUP) operates a cloud-based business spend management (BSM) software, which includes services such as supplier management, invoicing, spend analysis and payment solutions. Investors were seen selling off the company shares at the end of the first quarter of 2022, where 46 hedge funds were long on the company shares as compared to 59 hedge funds at the close of the fourth quarter. Its shares have seen a decline of 59.18% since the start of the year as of May 25.
On May 19, analyst Robert Simmons from research firm DA Davidson initiated coverage of Coupa Software Incorporated (NASDAQ:COUP) with a ‘Neutral’ rating and a $75 price target. Simmons notes although near-term performance will likely be muted, the firm is well-positioned to return to 20% organic growth within a few quarters, and sees it as the strongest provider in the business spent management space.
However, Goldman Sachs analyst Gabriela Borges noted on May 12 that business spend management is maturing as a category and the next phase of share price gain will be more difficult to come by. She sees the risk/reward on the company shares as negatively skewed over the next year, and double downgraded Coupa Software Incorporated (NASDAQ:COUP) to ‘Sell’ from ‘Buy’ with a revised price target of $64 from $83.
In April, Coupa Software Incorporated (NASDAQ:COUP) announced a multi-year brand partnership with the New York Yankees. This partnership will feature in-stadium engagement, and also includes an agreement with the Yankees Radio Network to feature the company during radio broadcasts.
Here is what ClearBridge Investments had to say about Coupa Software Incorporated (NASDAQ:COUP) in its Q2 2021 investor letter:
“Within IT, we added positions in Coupa Software, a leader in the fast growing Business Spend Management market with opportunity to double its total addressable market by harnessing B2B payments with its Coupa Pay product; and AppLovin, a leading mobile gaming advertising network in a unique position to utilize its ad expertise to grow its own mobile game business at low user acquisition costs.”
7. Twitter, Inc. (NYSE:TWTR)
Number of Hedge Fund Holders: 68
Decline in Hedge Fund Holders: 15
Twitter, Inc. (NYSE:TWTR) has been in the spotlight lately as Tesla boss Elon Musk proposed to buy the social media company in a deal worth $44 billion which prices each share at $54.20. Shares currently trade at $37.16 as of May 25, and have lost 12.89% in value in the year to date. Despite a few hiccups, Twitter executives on May 19 confirmed that the deal was moving forward as planned, and was not “on hold”.
On May 24, Jefferies analyst Brent Thill lowered the firm’s price target on Twitter, Inc. (NYSE:TWTR) to $40 from $48 and reiterated a ‘Hold’ rating on the shares. He noted that social media firm Snap’s announcement that its Q2 revenue growth would come in below guidance is “indicative of a rapidly deteriorating macro environment that will likely impact the whole ad industry.” The analyst subsequently lowered his FY22 and FY23 revenue estimates for several digital advertising companies.
For the first quarter, Twitter, Inc. (NYSE:TWTR) reported earnings per share of $0.90, outperforming estimates by $0.87. Revenue of $1.20 billion for the quarter was below consensus estimates by $25 million but grew 15.92% year-on-year.
Amid the macro uncertainty as well as speculation over the company’s future, investors sold off their stakes in Twitter, Inc. (NYSE:TWTR). At the close of the first quarter, 68 hedge funds reported ownership of stakes in the company, down from 83 hedge funds a quarter earlier. Elliott Management held 10 million shares of Twitter, Inc. (NYSE:TWTR) in the first quarter at a value of $386.9 million, making it the firm’s largest shareholder.
Investment firm ClearBridge Investments discussed the prospects of Twitter, Inc. (NYSE:TWTR) in its Q4 2021 investor letter. Here’s what the fund said:
“Weakness among our holdings in the communication services sector was the other detractor to performance. Twitter shares sold off following weaker than expected third-quarter results, but under new leadership, we see the potential for improved execution and performance as live events and entertainment return to pre-pandemic levels.”
6. Shopify Inc. (NYSE:SHOP)
Number of Hedge Fund Holders: 72
Decline in Hedge Fund Holders: 14
Shopify Inc. (NYSE:SHOP) is a Canadian firm which operates an e-commerce platform. It posted earnings per share of $0.20 for the first quarter, missing market estimates by $0.45. The company’s revenue for Q1 also fell below estimates by $36.4 million, coming in at $1.2 billion.
On May 23, Jefferies analyst Samad Samana kept a ‘Buy’ rating on Shopify Inc. (NYSE:SHOP) shares, and slashed the firm’s price target to $475 from $550, noting that consumer behavior is shifting amidst a slowdown in e-commerce spending. Baird analyst Colin Sebastian kept an ‘Outperform’ rating on Shopify Inc. (NYSE:SHOP) shares on May 6, noting that the firm’s Q1 results which fell below expectations were not surprising given weakening e-commerce trends as of late. However, he maintains a long-term bullish view on the company across e-commerce, payments, software and fulfilment, but sees near-term headwinds in the macro environment amid shifting consumer spending patterns. He revised the price target to $630 from $1000.
As of the end of the first quarter, 72 hedge funds reported stakes worth $5.78 billion in Shopify Inc. (NYSE:SHOP). In contrast, 86 hedge funds held positions worth $12.01 billion in the company a quarter earlier. As of May 25, the e-commerce firm has seen its share price fall by 75.56% in the year to date.
Baron Funds, an investment firm, discussed the market position of Shopify Inc. (NYSE:SHOP) in its Q1 2022 investor letter. The fund said:
“Shopify Inc. is a cloud-based software provider offering an operating system for multi-channel commerce. Shopify has been adopted by over two million merchants who processed $175 billion of gross merchandise volume in 2021, making it the second largest e-commerce player in the U.S. The stock corrected sharply in the first quarter, declining 51%, as a result of investor rotation out of fast-growing, long-duration stocks and after the company released quarterly results, expecting a normalization in the rapid growth it has experienced during the early stages of the pandemic. We remain shareholders as we believe Shopify has a long runway for growth addressing less than 1% of global commerce spending with a unique and competitively advantaged platform.”
Just like Shopify Inc. (NYSE:SHOP), Tesla, Inc. (NASDAQ:TSLA), Meta Platforms, Inc. (NASDAQ:FB), and Apple Inc. (NASDAQ:AAPL) are some tech names under pressure within the current market situation.
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