Maverick Capital, a $10.5 billion hedge fund, is betting big that the smartphone market has ‘hit a tipping point’

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Lee AinslieCraig Barritt/Getty Images

  • 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 believ
    e 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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