Tech Stock Thoughts #13: Navigating a Momentum-Stock Reckoning and Broader Tech Correction

This post is meant to be a follow-up to the commentary provided in Tech Stock Thoughts #12.

During a week in which tech stocks saw some pretty wild swings, I mostly stood pat. And I actually opened up a couple of new short positions on Monday morning, to go with one long position in a beaten-up name. My reasoning:

1. I think my shorts are still fairly overvalued, and while many are now down sharply from their February highs, quite a few are still comfortably above where they traded just four months ago — a point in time by which markets had already seen quite a lot of speculative behavior. Many other high-multiple names also remain above where they traded in early-to-mid November.
2. A majority of the names on my long watchlist are still up comfortably over the prior four months as of Friday’s close, with a lot of them also still up a fair amount YTD — that leaves a lot of paper profits for more nervous investors to take during a major tech correction. And while the risk/reward for the group has improved, only a few names (generally low-multiple chip developers and equipment makers) have reached levels that are really tempting me to buy.
3. Following the recent bloodletting in high-multiple tech stocks, both margin debt and a potential vicious cycle between lower bubble-stock prices, ARK fund outflows, and ARK fund sales continue looming large (ARK saw outflows even on Friday, as the Nasdaq rose 1.6%). Also, to reiterate, I think some of the psychological factors that have led many people to aggressively buy, bid up and/or speculate on a variety of assets during the pandemic — I’m sure that some very good books will be written about this phenomenon one day — are in the early stages of going away as COVID cases/hospitalizations plunge and reopenings kick off.

Some other thoughts:

• A lot of the most speculative stocks (various SPACs, EV/clean energy names, cannabis plays, etc.) started getting hit around mid-February. And over the last week or so, many high-multiple SaaS and stay-at-home plays began falling sharply. Are cryptos/NFTs the next shoe to drop? It makes sense in a way that cryptos would take longer to go, given both the extent of retail enthusiasm and a relatively small institutional presence. And just maybe, the current NFT craze ends up being for the crypto frenzy what GameStop/Wallstreetbets was to the bubble-stock frenzy — the moment where the phenomenon truly jumped the shark and as a result reached a turning point. (As an aside, I recommend reading Seth Godin’s recent piece on why he’s not a fan of NFTs.)
• More than any other stock, Tesla feels like a bellwether for the reckoning happening for many Robinhood favorites, given its market cap (still at $540B), its mindshare among newer retail investors and ARK’s large position in the company. And Tesla, it’s worth noting, is still up more than 35% from where it was 4 months ago — admittedly, it did get added to the S&P 500 along the way — and up more than 200% from the peak it reached during a massive pre-COVID run-up. I could be wrong, but I suspect that this correction doesn’t end before Tesla (Monday close of $563) reaches the 400s — a range that it occupied as recently as mid-November.

Tesla’s 6-month chart. Source: Google Finance.

• While it’s hardly a contrarian view to think that travel/hospitality spend is going to jump in the coming months, I think markets are still underestimating just how big the surge could be, in much the same way that most people (myself included) underestimated in March 2020 just how much e-commerce and gaming spend would soar during the pandemic. Living in a Millennial-filled urban area in a state that removed capacity limits on bars and restaurants on Saturday, it already feels like a pot is starting to boil over. And of course, the arrival of another $1.9T in stimulus will add fuel to the fire beneath it. (This, by the way, is why I remain bullish on the cruise lines in spite of their recent gains and large debt loads. Thinking cruise demand/pricing will merely go back to pre-COVID levels might prove to be a bit like thinking a year ago that graphics card sales will merely hold steady during the pandemic.)
• Related: As much as rising bond yields have made headlines lately, the yield on 3-year Treasurys is still only at 0.34%. Bond markets are at most pricing in one rate hike by the Fed over the next 12–18 months, which in turn means they’re buying predictions that reopenings and stimulus will only cause a moderate, transitory, inflation spike that won’t require significant Fed tightening. We’ll see.
• That $1.9T stimulus bill will naturally be a boon for a lot of things besides travel/hospitality spend. Though the impact will be lessened some by reopenings and lower income caps for checks, $1,400 stimulus checks should drive one more surge for e-commerce, gaming and consumer hardware spend. And it’s likely that some meaningful chunk of the $350B and $130B that’s respectively being doled out to state/local governments and schools will go towards tech investments (as it is, government and education have been relatively strong IT spending verticals lately). Notebooks/tablets, security, SaaS apps and public cloud services could get an outsized share of this spending.
• I’m starting to think that 2021 tech prediction #7 (Consumer Hardware Sales Cool Off…and Trigger a Second-Half Chip Inventory Correction) will at least be half-wrong. A very long list of major chip developers, including NXP, Marvell, Broadcom, Microchip, Analog Devices and Nvidia, have now signaled that they expect demand to exceed supply for much or all of 2021 (Broadcom also mentioned that its 2021 capacity is now 90% booked). And while reopenings could pressure demand for some chip end-markets such as notebooks and gaming hardware, they could boost demand for others, such as smartphones and cars. Throw in second-half seasonal strength and currently-unmet demand in some end-markets due to shortages, and an inventory correction might not happen until 1H22. All of that, together with chip equipment demand tailwinds and still-moderate valuations for certain names, makes me think that chip stocks are a good place for bargain-hunters to look as tech stocks correct.

Position updates: I opened short positions in Bill.com (BILL) and Wayfair (W), and a long position in Splunk (SPLK), on Monday morning.

Long watchlist updates: Broadcom (AVGO), Marvell Technology (MRVL) and Pinterest (PINS) have been added to the watchlist.

My current long positions: Carnival (CCL), Facebook (FB), Fusion Acquisition/MoneyLion (FUSE), Groupon (GRPN), Mitek Systems (MITK), Norwegian Cruise Line (NCLH), Nutanix (NTNX), Osprey Technology Acquisition/BlackSky (OSTF), Royal Caribbean (RCL), Salesforce.com (CRM), Splunk (SPLK), SuperMicro (SMCI), Western Digital (WDC)

My current short positions: 3D Systems (DDD), Agora (API), BigCommerce (BIGC), Bill.com (BILL), Blink Charging (BLNK), Churchill Capital/Lucid Motors (CCIV), FuboTV (FUBO), FuelCell Energy (FCEL), Lemonade (LMND), Luminar Technologies (LAZR), MicroVision (MVIS), Nio (NIO), Plug Power (PLUG), QuantumScape (QS), Tesla (TSLA), Wayfair (W)

My long watchlist: Alibaba (BABA), Amazon.com (AMZN), ANGI Homeservices (ANGI), Applied Materials (AMAT), Baozun (BZUN), Bitcoin, Broadcom (AVGO), Cohu (COHU), Eventbrite (EB), Ichor Holdings (ICHR), Marvell Technology (MRVL) Micron (MU), ON Semiconductor (ON), One Stop Systems (OSS), Pinterest (PINS), Synaptics (SYNA), Ultra Clean Holdings (UCTT)

YTD gain as of the March 8 close (excluding the crypto account): 32%
YTD gain as of the March 8 close (including the crypto account): 40%

Disclaimer: None of the above commentary should be taken as formal stock recommendations or investment advice. Please do your own research before taking a position in any of the companies mentioned.