- Maverick Capital, a $ 10.5 billion hedge fund run by Lee Ainslie, is betting against companies that will be hurt by the maturation of the smartphone market.
- The bet is the firm’s largest collective short position, according to a year-end letter dated January 30.
“The last ten years represented the glory days of the smartphone revolution; however, we believe the next ten years will be very different,” the letter said.
Maverick Capital, the $ 10.5 billion hedge fund run by Lee Ainslie, is betting big against the smartphone market.
The firm said in a January 30 letter to investors that its largest collective short position is companies that it thinks will be negatively impacted by a slowdown in the smartphone market. Smartphone sales declined slightly in 2017, reversing a trend of rapid growth over the past decade, as Business Insider’s Steve Kovach reported.
Maverick said in the letter that it’s explaining its most critical positions to help “investors understand why we believe that our portfolio is well positioned for a meaningful rebound.” Maverick was down about 2% through the fall of last year, and the letter describes “disappointing alpha generation on both the long and the short side” since mid-2016. The firm’s flagship fund gained 1.8% in January, according to a person familiar with the matter who asked not to be named speaking about private matters.
In an analysis penned by Andrew Warford, who is chairman of Maverick’s stock committee, the fund set out its thesis for why the smartphone market has hit a “tipping point.” The thesis can be summarized as:
- “The last ten years represented the glory days of the smartphone revolution; however, we believe the next ten years will be very different.”
- That’s because technological change has slowed down, with processing power only increasing incrementally, and network speeds plateauing until the launch of 5G.
- “Optical sensing is interesting, but at this point, the greatest use case appears to be talking Emojis,” the letter said. “The lack of killer feature functionality in new smartphones delays consumer upgrades.”
- Operators now provide more transparency around the cost of upgrading, which consumers often deciding to keep their phones for longer as a result.
- “Over the last ten years, the value proposition was clear – you get an awful lot in terms of new functionality, which more than justifies the cost to upgrade,” the letter said. “Today, the answers to those questions are different – you do not get much which does not come close to justifying the step function increase in the cost to upgrade, and as the below chart show the cost to upgrade changed dramatically with the introduction of the iPhone X. We believe we have reached a tipping point.”
- Chinese handset makers have also entered a “down cycle,” the letter said, driven by weaker domestic demand. That can have a dramatic impact on the smartphone supply chain, as they run with higher levels of inventory.
- “If demand does not materialize, they drastically cut orders,” the letter said. “We believe smartphone component vendors will be enduring the consequences of these cuts in the first half of 2018.”
- As a result, Maverick said most of its capital dedicated to the trade is betting against companies in the supply chain.
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