Tech Selloff: Hedge Funds are Dumping These 10 Stocks in 2022

In this article, we discuss the 10 stocks hedge funds are dumping amid the tech selloff 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.

Luis Louro / shutterstock.com

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. 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. 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., Meta Platforms, Inc., and Apple Inc., Cloudflare, Inc. 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. 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. 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., 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.. 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. 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 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 to ‘Sell’ from ‘Buy’ with a revised price target of $64 from $83.

In April, Coupa Software Incorporated 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 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. 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. 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.. 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. 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. 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. 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. 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.

Just like Shopify Inc., Tesla, Inc., Meta Platforms, Inc., and Apple Inc. are some tech names under pressure within the current market situation.

5. Sea Limited (NYSE:SE)

Number of Hedge Fund Holders: 77

Decline in Hedge Fund Holders: 31

Sea Limited (NYSE:SE) provides a range of e-commerce, fintech and digital entertainment services around the world. It is based in Singapore, and operates e-commerce platform Shopee, and provides payment processing services through its brands ShopeePay, SPayLater, and SeaBank.

Shares of the company have experienced a decline of 66.10% so far in the year as of May 25, and hedge fund sentiment is also negative around the stock. 77 hedge funds owned positions in Sea Limited at the end of Q1 2022, down from 108 hedge funds a quarter earlier.

HSBC analyst Piyush Choudhary reiterated a ‘Buy’ rating on Sea Limited shares on May 4, and lowered the price target to $145 from $150. The analyst expects the firm’s e-commerce platform Shopee to post a jump of 40% in gross merchandise volume in comparison to last year, and sees Sea Limited’s (NYSE:SE) adjusted revenue growing 32% year-over-year in the first quarter.

For the first quarter, Sea Limited reported earnings per share which beat market estimates by $0.42. $2.9 billion in revenue for the quarter outperformed analysts’ forecasts by $41.2 million, and showed a jump of 64.41% from the year-ago quarter.

Here is what investment firm Farrer Wealth Advisors had to say about Sea Limited in its Q1 2022 investor letter.

“Sea Limited had been selling off since its peak in early November of ~$363/share. This was driven by both a general sell off in tech, especially non-profitable tech, and a general belief that its gaming arm (Garena) was experiencing a slowdown due to its flagship game Free Fire. Free Fire has experienced a slowdown for three reasons: it is a victim of its own success, and by the end of Q321, nearly 10% of the world’s population already played the game, and thus reaching new users was difficult; A return to normal with people traveling/going out more and spending less time playing games; and the Indian market imposed a ban on the game due to anti-Chinese sentiment (Tencent is a large shareholder in Sea). We believed that these issues, while worth considering, were a bit overblown, and some of the data we saw from 3rd party sources showed that though Free Fire usage was dipping, it wasn’t too drastic. Thus, we marginally added to the position throughout the quarter. This was a mistake. During Sea’s earnings report in early March, the company guidance for Garena (down nearly 35% yoy) showed that the slowdown was far worse than predicted. Secondly, Shopee (Sea’s ecommerce arm) has pulled out of certain markets (in Europe and India), which long-term is probably the right strategy, but short-term hampers the optionality of the business. After considering this information and the guidance from earnings, we decided to significantly trim the position. In our opinion, management does have a bit of egg on its face from an overly aggressive expansion or as one investor called it, “bull market hubris.” We think management’s moves were mostly logical, it’s just that their failures came during an unforgiving market. While we believe that Sea’s future is still bright (especially with regards to their e-commerce and financial services), it will take a few quarters of strong earnings for them to regain their momentum, and for now the capital can be better spent elsewhere.”

4. Tesla, Inc. (NASDAQ:TSLA)

Number of Hedge Fund Holders: 80

Decline in Hedge Fund Holders: 11

Tesla, Inc. deals in the production of electric vehicles. The market is reacting negatively to a spate of bad news coming from the company, such as slowing production and sales in China owing to Covid lockdowns, and distraction from founder Elon Musk’s proposed $44 billion bid to acquire Twitter. Investors feel Musk may sell shares of Tesla to finance his bid for Twitter, and subsequently the shares of the EV-maker have dropped 24.83% in the last one month, and 45.09% in the year to date as of May 25.

Daiwa analyst Jairam Nathan on May 24 slashed the firm’s price target on Tesla, Inc. to $800 from $1,150 and reiterated an ‘Outperform’ rating on the company shares.

At the close of Q1, a total of 80 hedge funds from the database of Insider Monkey reported bullish bets on Tesla, Inc. shares, showing a negative trend from the preceding quarter where 91 hedge funds held positions in the company.

3. Block, Inc. (NYSE:SQ)

Number of Hedge Fund Holders: 84

Decline in Hedge Fund Holders: 12

Block, Inc. (NYSE:SQ) provides financial services through its brands including Square, Cash App, TIDAL, and Spiral. It was founded by Twitter boss Jack Dorsey in 2009, and is headquartered in California. As part of the market sell-off in tech, shares of the company have posted a loss of 52.48% in the year to date as of May 25.

Investors dumped their positions in Block, Inc. at the close of the first quarter, where 84 hedge funds reported holding stakes in the company. This is in comparison to 96 hedge funds in the previous quarter.

On May 23, analyst Andrew Jeffrey from Truist cut his price target on Block, Inc. to $145 from $165, but maintained a ‘Buy’ rating on the company shares. The analyst decreased the price target owing to reduced valuations, but feels Block can become one of the world’s most important fintech firms, rivalling big names such as Visa Inc. (NYSE:V). The company’s business fundamentals are poorly understood, according to Jeffrey, who says this creates a good opportunity for long-term investors.

Farrer Wealth Advisors, an investment firm, discussed the prospects of Block, Inc. in its Q1 2022 investor letter. It said:

“Block (formerly Square): We ‘adopted’ Block’s stock after the company bought Afterpay, which we were investors in. We had been trimming the Afterpay position throughout 2021 and trimmed again after the acquisition, so the position was quite small. We held onto that small portion, as we did think the acquisition made sense and were excited to see the two companies integrate and for Block to create a closed loop network between merchants and consumers. However, the market punished most highly valued tech stocks over the last months, and we saw the position move against us by over 50%. We are firm believers that when a stock goes against you by 50%+, you need to do something about it. Either trim/sell and reinvest or buy more. In the case of Block, the original reason for holding was to see how the acquisition and integration with Afterpay panned out. The market did not give us the time to see this play out, thus we were not comfortable adding more to the position. Further for the stock to recover to our purchase price, we felt the company’s valuation would need to command a future exit multiple that the market would be unlikely to pay in this environment. Given this, we exited the remainder of the position.”

2. Paypal Holdings, Inc. (NASDAQ:PYPL)

Number of Hedge Fund Holders: 100

Decline in Hedge Fund Holders: 10

Paypal Holdings, Inc. (NASDAQ:PYPL) is a payment solutions provider which lets users send and receive money in 200 markets around the globe in approximately 100 currencies. Shares of the world’s most prominent digital payments company were not immune from the negative market sentiment around tech stocks, and as of May 25, they have slid 58.90% in the year to date.

110 hedge funds held positions in Paypal Holdings, Inc. at the end of December, but this number dwindled down to 100 hedge funds at the close of the first quarter. In Q1 2022, Fisher Asset Management was the most prominent shareholder of the company, holding a gigantic stake worth more than $1.9 billion.

Analyst James Faucette of Morgan Stanley maintained an ‘Overweight’ rating on Paypal Holdings, Inc. shares on May 10, and adjusted the price target to $137 from $139. He feels that the market is missing the firm’s outperformance as it continues to outpace underlying e-commerce growth. The company’s revenue trajectory has normalized since coming out of the pandemic, but this is not a structural issue according to the Morgan Stanley analyst.

Paypal Holdings, Inc. posted its Q1 earnings at the end of April, and reported EPS in-line with estimates. $6.48 billion in revenue for the quarter beat analysts’ estimates by $75.6 million.

Investment firm Wedgewood Partners discussed the market position of PayPal Holdings, Inc. in its Q1 2022 investor letter. The fund said:

“PayPal also detracted from performance during the quarter as investors panicked in the face of the well-telegraphed run-off of eBay’s revenues. We have been aware of the runoff of eBay’s revenues since at least the third quarter of 2017.2 Although markets are supposedly efficient, maybe markets are only as efficient as long as the same shareholders are in the stock. When a shareholder base turns over several, if not dozens, of times over a 5-year time frame, perhaps old news periodically becomes “new” to a market riddled with transient shareholders. In any case, we increased our weightings in the stock for the first time since 2018 as the only thing “new”to us was the highly attractive multiple for a competitively wellpositioned business in the e-commerce industry.”

1. Meta Platforms, Inc. (NASDAQ:FB)

Number of Hedge Fund Holders: 200

Decline in Hedge Fund Holders: 24

Meta Platforms, Inc. is the parent company of Facebook, WhatsApp and Instagram. On May 16, Morgan Stanley analyst Brian Nowak gave an unchanged ‘Overweight’ rating to Meta Platforms, Inc. shares, along with a price target of $330. He notes that the firm has significantly reduced its hiring and operating expenses per head, and this will result in cost discipline leading to significant free cash flow, and revenue acceleration in the second half of the year.

Out of all the hedge funds tracked by Insider Monkey, 200 reported bullish bets on Meta Platforms, Inc. shares at the end of Q1 2022, with a collective price tag of $19.33 billion. This shows a negative trend from the previous quarter where 224 hedge funds owned $31.84 billion worth of positions in the tech giant.

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