The Nasdaq Compound fell into bearish 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, led by billionaire Chase Coleman, unloaded nearly 1.2 million shares of Microsoft (MSFT 4.66%)and Two Sigma Investments, managed by co-founder John Overdeck, sold 171,000 shares of Airbnb (ABNB 4.57%). When such respected hedge fund managers sell these growth stocks, is that 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 suite of office productivity programs, Microsoft 365. Applications such as Word and Excel are essential for many businesses, and Microsoft owns nearly 90% office productivity software market share, according to research firm Gartner. Even more impressively, 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 video conferencing market share, Microsoft Azure ranks second behind Amazon Web services in cloud infrastructure and Microsoft Dynamics rank third in customer relationship management (CRM) software.
This catalog of popular products has generated consistently impressive financial results. Revenue rose 20% to $192.6 billion in the past year, and free cash flow jumped 18% to $63.7 billion. Even better, Microsoft is well positioned to maintain this momentum.
As organizations continue to invest in digital transformation projects, sectors such as cybersecurity, cloud computing, and productivity software are expected to continue to grow rapidly. In addition, netflix recently chose Microsoft as a business and technology partner to create an ad-supported streaming service. This could strengthen Microsoft’s position in the digital advertising industry, which is rapidly approaching a $1 trillion addressable market.
Suffice it to say, Microsoft has a lot of potential. So why did Coleman sell? I guess he felt uncomfortable with the size of the position. Even after selling 1.2 million shares, Microsoft remains its hedge fund’s second-largest holding, accounting for more than 8% of its portfolio. From that perspective, Coleman still seems optimistic about Microsoft.
Airbnb has reinvented travel and tourism with a more efficient business model. Its platform brings together rental properties from millions of hosts, allowing customers to book vacations and activities in thousands of cities around the world. This makes Airbnb more agile than traditional hotel businesses. It can onboard a new host and add new inventory in minutes, but it takes years (and costs millions of dollars) to build a new hotel.
Airbnb also gives customers more flexibility in terms of accommodations and location. Lists range from homes and apartments to cabins and castles, and they span from suburbs and cities to coastlines and farmland. Few (if any) traditional hotel companies offer anything close to this level of optionality.
The company has turned these benefits into truly spectacular financial results. Revenue soared 93% to $6.6 billion in the past year, and free cash flow increased more than fivefold to $2.8 billion. This equates to a monstrous 42% free cash flow margin, which speaks to a very efficient business model.
Airbnb has rolled out several potentially game-changing features over the past few years. In 2021, it introduced flexible search parameters, which turns its platform into a recommendation engine by allowing customers to come up with a wider range of travel ideas for situations where their schedules are not 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 customers to search for specific features like homes with pools, accommodations near national parks, or designer architecture.
Constant innovation should help Airbnb stay ahead of the competition. And with an addressable market of $3.4 trillion, Airbnb certainly has a long streak for growth.
So why did Overdeck sell? I guess he too wanted to reduce his position. Of course, macroeconomic headwinds may have entered into the calculation, as consumers would likely spend less on travel and tourism during a recession. That being said, Airbnb is the ninth largest position (out of over 4,800) in the 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 I bought a stock are no longer valid, I sell the entire position. The second scenario deals with position size. If stock price appreciation has pushed my stake in a company beyond my comfort zone, I will sell part of my position.
This is how I would approach Microsoft and Airbnb right now. Assuming none of the above scenarios apply to you, I’d say now is a better time to buy these growth stocks than to sell them.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Trevor Jennewin has positions at Airbnb, Inc. and Amazon. The Motley Fool holds posts and recommends Airbnb, Inc., Amazon, Microsoft, Netflix, and Zoom Video Communications. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.