You probably don't need me to tell you this, but this has been one of the most challenging years on record for Wall Street and investors. In the roughly five to seven months since all three major U.S. indexes hit their all-time closing highs, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have respectively plunged as much as 19%, 24%, and 34%.
Heightened stock market volatility has been particularly cruel to technology-based growth stocks, which had been largely responsible for the monstrous rally that followed the March 2020 pandemic bottom. It's not uncommon to see once high-flying tech-driven stocks down anywhere from 50% to more than 90% from their record highs.
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Yet in spite of this proverbial train wreck, select billionaire money managers can't seem to get enough of these beaten-down companies. Based on Form 13F filings with the Securities and Exchange Commission, three billionaire money managers were actively scooping up technology-driven growth stocks in the first quarter. Even with these stocks 82% to 92% below their all-time highs, billionaires can't stop buying them.
Shopify: Down 82% from its all-time high
The first tech-focused company that's taken it on the chin, yet remains popular among successful money managers, is cloud-based e-commerce platform Shopify (SHOP 0.14%). Billionaire Ken Fisher of Fisher Asset Management bought 201,665 shares of Shopify during the first quarter, which more than quintupled his fund's stake at the end of 2021.
Shares of Shopify have tumbled a jaw-dropping 82% since hitting their all-time high of $1,762.92 in mid-November. Skeptics appear to be worried about the combination of inflation and persistent supply chain issues.
Historically high domestic inflation, coupled with pandemic-related supply disruptions, could hit low-and-middle-income consumers hard. In turn, this has the potential to adversely impact new subscriber growth and the desire for existing merchants to upgrade to services that generate higher operating margins for Shopify.
Shopify's valuation has, arguably, also been an eyesore. Even after tumbling 82%, the company is valued at more than four times Wall Street's forecast sales for 2023 and well over 100 times consensus earnings per share. During bear markets, it's not unusual for Wall Street and investors to become more critical of companies trading at nosebleed earnings multiples.
However, it's hard to ignore the success Shopify has had growing its ecosystem. Even as online retail sales normalized throughout the latter half of 2021 and into 2022, gross merchandise value traversing its platform continues to grow by a double-digit percentage. Shopify has previously estimated that it has a $153 billion addressable market on its doorstep just from small businesses.
Reinvesting in its ecosystem can boost the company's long-term growth potential and merchant appeal, as well. As an example, the company launched a buy now, pay later (BNPL) service known as Shop Pay in June 2021. This BNPL service, which now includes the option of monthly payments, has seen its share of the U.S. BNPL market climb in the U.S.
While I see tremendous value in Shopify's operating model over the long run, I suspect it could be a bumpy ride until the latest Federal Reserve monetary-tightening cycle is complete.
Coinbase Global: Down 86% from its all-time high
Another tech-driven company that's lost most of its value but continues to be bought by billionaire money managers is cryptocurrency exchange and ecosystem Coinbase Global (COIN 2.01%). During the first quarter, billionaire Jeff Yass of Susquehanna International purchased 622,497 shares of Coinbase, which increased his stake in the company by 271% from the December-ended quarter.
Susquehanna's fascination with Coinbase likely has to do with its dominant performance in 2021. When the year came to a close, Coinbase had $278 billion in assets on its platform, 11.4 million monthly transacting users, and it ultimately earned $14.50 per share. It's very clearly the most trusted exchange in the crypto space and one of the more direct ways for investors to ride the coattails of the digital currency euphoria.
But there are also a number of red flags that help explain why shares of the company have plunged 86% since hitting their all-time intraday high. For example, a significant portion of Coinbase's trading revenue has historically been tied to Bitcoin and Ethereum. Instead of relying on innovation, Coinbase is effectively tethered to the emotional ebbs and flows that move the crypto markets' largest digital currencies.
To add to the above, the cryptocurrency space is experiencing a crash of its own at the moment. The last time Bitcoin shed 80% of its value, Coinbase saw its revenue effectively get halved.
Perhaps the bigger concern with Coinbase is that there's no true barrier to entry in the cryptocurrency exchange space. Any platform could undercut Coinbase's transaction fees in an effort to lure traders away. We witnessed a similar commission pricing war among online stock brokers that eventually led these brokerages to ditch commissions altogether.
I expect operating margin pressure to continue ramping up over time, which makes Coinbase a stock to avoid.
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Redfin: Down 92% from its all-time high
A third tech-driven stock that's been beaten to a pulp but remains firmly on the radar of billionaire fund managers is Redfin (RDFN 0.57%). Chase Coleman of Tiger Global Management gobbled up 1,839,324 shares of Redfin during the first quarter, which vastly increased his fund's position from around just 15,000 shares held at the end of 2021.
Among the three companies listed here, Redfin is the clear disaster du jour. Since hitting its all-time intraday high of more than $98, shares of the company have fallen an almost unfathomable 92%. Skeptics are clearly worried that 30-year mortgage rates recently surpassing 6% will pour cold water on what had been a red-hot housing market.
The other issue for Redfin is that the company has sacrificed profitability in favor of expanding its market share. This is a trade-off that Wall Street gladly turns a blind eye to during bull markets. However, income statements tend to take on greater importance during bear markets. With Redfin losing quite a bit of money, there's the real possibility it may have to raise additional capital at some point in the future.
On the other hand, Redfin brings clearly identifiable competitive advantages to the table. Whereas traditional real estate firms charge a 2.5% or 3% commission/listing fee, Redfin charges its clients 1% or 1.5%, depending upon how much previous business was done with the company. An up to 2 percentage-point difference equates to more than $7,800 in cost savings for sellers, based on a $391,200 median sales price for U.S. existing homes in April, as per the National Association of Realtors.
Additionally, Redfin offers a level of personalization that few, if any, other real estate companies can match. It has a successful iBuying program, known as RedfinNow, which purchases homes for cash and removes the hassle and haggling typically associated with selling a home. Meanwhile, its Concierge service can help sellers maximize the value of their homes by advising them on upgrades and handling staging.
Although Redfin is facing what's easily the toughest housing environment in over a decade, its market-share gains suggest it has the potential to be a long-term winner.
