- Greenlight Capital, the firm founded by the renowned hedge fund manager David Einhorn, told investors that the market seemed to have adopted a new way to value companies, one based on their ability to disrupt competition. He addressed recent performance at Greenlight and the “bubble shorts” Amazon, Tesla, and Netflix, saying time would tell whether the “joke is on us.”
Greenlight Capital, a $7 billion hedge fund founded by David Einhorn, told clients that the market may have adopted an “alternative paradigm” for calculating the value of stocks.
That’s according to a third-quarter client letter sent to investors Tuesday and reviewed by Business Insider.
Here’s an excerpt from the letter (emphasis ours):
“The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’
“Given the performance of certain stocks, we wonder if the market has adopted an alternativeparadigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.”
Greenlight’s funds gained 6.2% after fees in the third quarter, bringing its year-to-date return to 3.3%, the letter said.
The letter addressed the recent stock performance of Amazon, Tesla, and Netflix, a group of stocks Greenlight called its “bubble” shorts. The letter said Amazon’s and Tesla’s stock should have dropped much more than it did in the quarter, given the companies’ financial results.
“When we consider the business performance of our three most well-known ‘bubble’ shorts, we wonder if this alternative paradigm is in play,” the letter said.
- Amazon: “Our view is that just be cause AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.” Tesla: “Tesla (TSLA) had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%. We believe it deserved much worse.” Netflix: “On the second quarter conference call, the CEO stated, ‘In some senses the negative free cash flow will be an indicator of enormous success.’ To us, all it indicates is that NFLX is capable of dramatically changing the economics of stand-up comedy in favor of the comedians.”
Greenlight also exited a short of Best Buy with a loss. The firm said it “believed the TV and gaming cycle weakness would hurt results,” but instead Best Buy benefited from some of its best sales in years because of strength in the Nintendo Switch and high-end computing.
The letter closed with a quote from a song by Tom Petty and the Heartbreakers: “You can stand me up at the gates of hell. But I won’t back down.”
The firm managed $7 billion in hedge fund assets as of mid-year 2017, according to the Absolute Return Billion Dollar Club ranking.
A spokesman for Greenlight didn’t immediately respond to a request for comment.