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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
“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.
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
“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
- 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.