Over the long run, the stock market has proved to be a wealth-building machine. But wealth-building rarely occurs in an orderly fashion or a straight line.
Beginning more than a year ago, a number of top-performing, high-growth companies began selling off from their highs. As uncertainties surrounding the pandemic and inflation gained steam, many growth stocks took it on the chin.
But the beat-down some growth stocks have endured hasn't scared off some of Wall Street's most successful money managers. Based on Form 13F filings with the Securities and Exchange Commission, billionaire money managers couldn't stop buying the following three once high-flying growth stocks during the fourth quarter.
Among publicly traded companies with at least a $2 billion market cap, Canadian marijuana stock Canopy Growth (CGC -8.58%) is the 10th worst performer over the trailing 12 months, a decline of 82%. Nevertheless, this underperformance hasn't stopped John Overdeck and David Siegel of Two Sigma investments, or Jeff Yass of Susquehanna International, from piling in. Two Sigma added more than 3.22 million shares in the fourth quarter, with Susquehanna upping its stake by more than 332,000 shares.
Forgive the really bad pun, but the buzz surrounding Canopy Growth has always boiled down to two factors: the company's leading position in the North American cannabis market and its cash hoard.
As for the former, Canopy Growth is the top dog when it comes to Canadian flower sales. However, the company was widely expected to be a winner in the United States. With the Trump administration and now Biden administration failing to pass federal cannabis reforms, Canopy has had no way to enter the U.S. marijuana market. As a result, Canopy's vision of dominating the North American pot market has faded.
The other catalyst has always been the company's large cash pile. Spirits giant Constellation Brands has made four direct and indirect investments in Canopy, with the largest totaling $5 billion Canadian (about $3.92 billion U.S.) in November 2018. The expectation was that Canopy Growth would use this cash to make strategic acquisitions and expand its reach.
Unfortunately, the company has continued to burn through its cash at an extraordinary rate. Even with cost-focused CEO David Klein reining in expenses, the company suffered a free cash outflow of CA$168.3 million ($131.9 million U.S.) in the fiscal third quarter. In fact, the company now has a net-debt position after once having billions of dollars in net cash.
While there's no denying the growth potential for the North American cannabis market, there look to be better ways to play this growth than buying shares of Canopy Growth.
Another beaten-down growth stock that billionaire money managers can't seem to get enough of is online-services marketplace Fiverr International (FVRR 1.45%). Despite its shares declining by 74% on a trailing 12-month basis, Larry Fink of BlackRock, Jim Simons of Renaissance Technologies, and Overdeck and Siegel of the aforementioned Two Sigma Investments, were buyers in the fourth quarter. On a combined basis, these billionaire-run funds added close to 1.1 million shares.
The excitement surrounding Fiverr really took off when the coronavirus pandemic hit. For the past two years, the traditional office environment has been disrupted, allowing freelance workers to demonstrate what they can do in remote-work environments. In other words, the pandemic has rolled out the red carpet for freelance-based services -- and Fiverr is capitalizing on it.
Most online-service marketplaces are set up to allow buyers (i.e., companies or proprietors) to purchase services on a per-hour basis. Fiverr does things a bit different. Instead of per-hour pricing, its freelancers provide their scope of work as a package deal. This means far more transparency when buyers are purchasing services on the platform. It's something buyers clearly like, as evidenced by the 18% year-over-year increase in spend per buyer for 2021.
Something else that really separates Fiverr is its superior take-rate. Having a leading online-services marketplace pushed the company's take rate (i.e., what it gets to keep from deals negotiated on its platform) to 29.2% at the end of 2021. That was up from 27.1% in the prior-year period.
Fiverr's biggest obstacle might be its valuation. Even after a huge haircut, shares of the company are still valued at 51 times Wall Street's consensus earnings per share for 2023. In a rising-rate environment, investors will likely be focused on value more so than in recent years.
Lastly, there's Singapore-based tech stock Sea Limited (SE 2.45%), which has declined by 61% over the trailing 12 months. In spite of this beat-down, four billionaire money managers have piled in, including Larry Fink of BlackRock, Chase Coleman of Tiger Global Management, Ole Andreas Halvorsen of Viking Global Investors, and Israel Englander of Millennium Management. During the fourth quarter, these respective funds added over 3.34 million shares, more than 976,000 shares, close to 440,000 shares, and a tad above 425,000 shares.
Billionaires' fascination with Sea has to do with the company's three rapidly growing, yet diverse, operating segments. For the time being, the only one of those three generating positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is its gaming division, known as Garena. Mobile hit game Free Fire helped the company attract 654 million active users in the fourth quarter. More impressively, 11.8% of these users were paying to play, which is considerably higher than the pay-to-play conversion rate for the mobile gaming industry as a whole.
The company's digital financial services segment, known as SeaMoney, continues to grow like a weed as well. The number of mobile wallet users surged to 45.8 million in Q4, which was up about 90% from the prior-year period. Since Sea operates in a number of underbanked emerging markets, access to financial services via mobile wallets could be a serious long-term growth driver for the company.
But most of Sea's accolade comes from its e-commerce platform, Shopee. During the fourth quarter, Shopee processed roughly 2 billion gross orders, with gross merchandise value (GMV) hitting $72.8 billion on an annual run-rate basis. For context, GMV was only $10 billion for the entirety of 2018.
But like Fiverr, Sea's valuation looks to be its own worst enemy. With the company choosing innovation and expansion over profits, at least for the moment, Wall Street and investors have been left to digest larger-than-anticipated losses. Considering that Sea's sales growth is expected to "slow" to about 32% in 2022 (at the midpoint of its guidance) from 128% in 2021, more short-term downside is possible.