When Twitter recently reported its quarterly results, the stock surged 16 percent as the bulls celebrated the positive parts of the report. But at least one hedge fund manager who made money shorting the social media company last year says it is not time to cover yet.
Paul Wick, who since 2001 has been running the more than $300 million Seligman Tech Spectrum strategy, has maintained a small short position in Twitter after the negative bet ranked as his fifth-most-profitable short last year, when his long-short tech strategy gained 30 percent.
“I listened to the [earnings conference] call,” Wick says. “I was somewhat surprised the stock reacted so favorably.”
But Wick, whose long-short strategy was up more than 1 percent in January and has posted a 12.6 percent net annualized return since its 2001 inception, insists that Twitter’s valuation is way too high.
He points out that U.S. usage is slowing, with growth mostly coming from outside the U.S.
Meanwhile, Twitter is more than doubling its capital spending on data centers and real estate, from $250 million in 2014 to roughly $600 million in 2015.
“They are not cash flow positive after capital expenditures,” Wick asserts. He does not expect the company to report free cash flow in 2015.
Wick also points out that Twitter’s stock-based compensation is coming in at a stunning $750 million per year, which is dramatically raising the share count — thus diluting the stakes for everyone else. “I don’t quibble with the usefulness of the site,” Wick emphasizes. “It is not worth its value in the marketplace.”
Wick, who is not nearly as well-known as the high-profile Tiger Cubs who are very positive on Internet stocks, has been toiling in the tech sector for longer than many of them. He also has run the Seligman Communications & Information mutual fund for a little more than 25 years. The $3.9 billion fund has compounded at 14.7 percent annually since 1990. Wick also manages two other technology mutual funds and other accounts that total roughly $1 billion.
Wick’s most profitable short positions last year were 3D Systems, which makes 3-D printers; ChannelAdvisor Corp., a provider of cloud-based e-commerce software; Applied Micro Circuits Corp., the semiconductor maker; and IBM.
“Shorting has become easier in the past year or so,” Wick says. He explains that the correlation of stocks with the broad market has been declining significantly compared with several years ago, when macro events in Europe and elsewhere would cause stocks to rise and fall mostly in unison.
Wick says there is a lot of investor interest in Internet companies and 3-D printing companies. However, while none of the 3-D printing companies have particularly good fundamentals, valuations still went through the roof in 2013 and 2014, “before reality set in” during 2014 and into this year, Wick maintains.
Many of the stocks have plummeted in price, especially Stratasys, 3D Systems, ExOne, and Voxeljet. “Investors were too enamored of fast revenue growth and ignored weak profits and reckless business practices,” Wick says, citing, for example, the more than 40 acquisitions 3D Systems made in just three years.
Wick explains that as growth slowed in mid-2014, investors became more aware of the various issues surrounding these companies and subsequently knocked down their stock prices.
And while he concedes that several Internet companies have promising fundamentals, such as Google and Facebook, he notes that many companies with questionable businesses enjoyed stock-price surges in recent years. A few of them have recently “come down to earth,” says Wick, including Twitter, online retailers Wayfair and Zulily, online music service Pandora Media, couponing site Coupons.com and e-commerce software provider ChannelAdvisor.
On the long side, Wick is still positive on several of his biggest winners from last year.
For example, he says Synaptics, which makes touch sensors, display driver circuits and fingerprint biometric sensors for mobile phones, tablets and laptops, still has a modest valuation even though the stock surged by about 33 percent last year. Wick looks for the company to earn at least $8 a share in 2016, yet the stock is trading in the upper $70s as it develops new products. Wick also still likes Lam Research Corp., his second-best-performing long position last year.
