The Nasdaq Composite fell into bear market territory in the first quarter as concerns about high inflation, rising interest rates, and the possibility of a recession triggered sharp declines in many stocks. Amid the selling frenzy, Tiger Global Management, run by billionaire Chase Coleman, unloaded nearly 1.2 million shares of Microsoft (MSFT -0.32%), and Two Sigma Investments, managed by co-founder John Overdeck, sold 171,000 shares of Airbnb (ABNB -1.68%). When such well-respected hedge fund managers are selling these growth stocks, is it a signal that retail investors should follow suit?
Microsoft is one of the best-known brands in the world, and much of its success comes from its cornerstone suite of office productivity programs, Microsoft 365. Applications like Word and Excel are mission-critical for many businesses, and Microsoft holds nearly 90% market share in office productivity software, according to research company Gartner. Even more impressive, Microsoft 365 has more customers than any other enterprise software product in any category.
However, the company has also been successful in other markets, including cybersecurity verticals like endpoint protection and identity management. Additionally, Microsoft Teams is neck and neck with Zoom in videoconferencing market share, Microsoft Azure ranks second behind Amazon Web Services in cloud infrastructure, and Microsoft Dynamics ranks third in customer relationship management (CRM) software.
That catalog of popular products has fueled consistently impressive financial results. Revenue rose 20% to $192.6 billion over the past year, and free cash flow jumped 18% to $63.7 billion. Better yet, Microsoft is well-positioned to maintain that momentum.
As organizations continue to invest in digital transformation projects, industries like cybersecurity, cloud computing, and productivity software should continue to grow quickly. Additionally, Netflix recently selected Microsoft as its sales and technology partner for building an ad-supported streaming service. That could supercharge Microsoft's position in the digital ad industry, which is rapidly approaching a $1 trillion addressable market.
Suffice it to say Microsoft has plenty of potential. So why did Coleman sell? My guess is that he felt uncomfortable with the size of the position. Even after selling 1.2 million shares, Microsoft is still his hedge fund's second-largest holding, accounting for more than 8% of his portfolio. From that perspective, Coleman still seems bullish on Microsoft.
Airbnb has reimagined travel and tourism through a more efficient business model. Its platform crowdsources rental properties from millions of hosts, allowing guests to book stays and activities in thousands of cities around the world. That makes Airbnb more nimble than traditional hospitality companies. It can onboard a new host and add new inventory in minutes, but it takes years (and costs many millions of dollars) to build a new hotel.
Airbnb also offers guests more flexibility in terms of lodging and location. Listings range from houses and apartments to cabins and castles, and they span from suburbs and cities to coasts and farmlands. Few (if any) traditional hospitality companies offer anything close to that level of optionality.
The company has parlayed those advantages into truly spectacular financial results. Revenue soared 93% to $6.6 billion over the past year, and free cash flow climbed more than fivefold to $2.8 billion. That works out to a monster free cash flow margin of 42%, which is evidence of a very efficient business model.
Airbnb has rolled out several potentially game-changing features in the past few years. In 2021, it introduced flexible search parameters, which turn its platform into a recommendation engine by allowing guests to surface a wider range of travel ideas for situations when their schedules aren't fixed. It also launched AirCover, free damage protection and liability insurance for all hosts. And in 2022, it added new discovery categories to the platform, allowing guests to search for specific features such as homes with pools, lodgings near national parks, or designer architecture.
Consistent innovation should help Airbnb stay ahead of the competition. And with a $3.4 trillion addressable market, Airbnb certainly has a long runway for growth.
So why did Overdeck sell? My guess is that he, too, wanted to downsize his position. Of course, macroeconomic headwinds may have entered into the calculation, since consumers would likely spend less on travel and tourism during a recession. That being said, Airbnb is the ninth-largest position (out of more than 4,800) in Two Sigma Investments' portfolio, which implies high conviction.
Is it time to sell?
Generally speaking, I only sell stocks in two different scenarios. The first is that my investment thesis is broken. If the reasons that I bought a stock are no longer valid, I sell the entire position. The second scenario deals with position size. If share price appreciation has pushed my stake in a company beyond my comfort zone, I will sell a portion of my position.
That is how I would approach Microsoft and Airbnb right now. Assuming neither of the above scenarios applies to you, I'd say this is a better time to buy these growth stocks than to sell them.