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Traditionally, tech has been one sector that value investors typically avoided, but as the world’s biggest tech companies start to show their age, some of these “old tech” stocks are starting to look like value stocks. Dan Loeb’s Third Point actually likes some “old tech” stocks and is turning to them with expectations of outperformance in 2022.
Third Point’s Q4 performance
The firm’s flagship Offshore Fund was down 5.3% in the fourth quarter, while the Ultra Fund lost 7.1%. Third Point’s flagship Offshore Fund gained 22.7% for the full year, while its Ultra Fund returned 26.9%. On an annualized basis since inception, the Offshore fund has returned 15.1%, while the Ultra Fund has gained 21.8%.
For comparison, the Credit Suisse Event-Driven Index returned about 7% since both funds’ individual inceptions. The S&P 500 returned about 10%, and the MSCI World Index gained about 8% annualized since the funds’ inceptions.
During the fourth quarter, Third Point’s top five winners were Rivian Automotive, Cie Financiere Richemont, PG&E, Intuit and Accenture. Its top five losers were Upstart Holdings, Prudential, Paysafe, The Walt Disney Company, and Restoration Hardware.
In his fourth-quarter letter, Loeb said the fourth quarter marked the beginning of a market-wide rotation from growth to value that accelerated into January. He expects this year to be one of “normalization across supply chains, public health and consumer spending.”
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Third Point is now looking for “value-oriented, ‘old’ tech stocks like Intel that deserve a second look” and merger arbitrage opportunities. The firm also prefers certain areas of technological innovation and Series B funding in the private markets, which Loeb expects will insulate its private portfolio from significant shock.
Perhaps one of the more surprising stocks in Third Point‘s portfolio is Amazon. The traditionally value-focused fund has owned shares of the e-commerce giant at various times over the years. Loeb said they built a “sizable position” in the early days of the pandemic as they looked for a structural revenue acceleration.
Amazon lagged behind its tech peers for much of last year, and Third Point added to its position. Loeb remains convicted that Amazon is “at an important crossroads as new management considers its long-term strategic plan to move the company forward.”
He noted that the online retailer’s latest quarterly earnings report bolstered his view that it now stands at an inflection point that should bring improvement in several metrics and an increase in its stock price. Loeb sees Amazon’s long-term secular growth drivers as cloud adoption and e-commerce penetration and notes that they remain “firmly intact.”
He expects sales growth to reaccelerate amid easing revenue comparisons and looks for improvements in Amazon’s fixed cost leverage following a large investment cycle that essentially doubled its fulfillment capacity over the last two years. Loeb pointed out that the pandemic-related costs should start to fade as the market normalizes.
Further, Amazon shares are trading toward the lower end of the company’s historical multiple range. Loeb added that Amazon is trading at a 30% to 40% discount to its present intrinsic value leading into a period of meaningful reacceleration in growth and “with an almost unlimited runway of potential to compound in value.”
Loeb also pointed to two events that occurred during the current quarter. The online retailer repurchased shares for the first time in 10 years. Additionally, management started breaking out the company’s ad revenue and detailing capital expenditures by category. Loeb believes the improved financial disclosure will help investors better understand the various parts of the company and its sum-of-the-parts value.
The Third Point chief addressed two stocks that could be categorized as “old tech,” which were Accenture and Intel. Loeb described Accenture as “the gold standard in IT services” and a “high-quality compounder at the nexus of two post-Covid megatrends.” He noted that the company stands to benefit from the acceleration of digitization across multiple industries and an emerging war over IT talent.
Accenture specializes in high-value work and leads the way in digital and cloud transformations. Over the last 20 years, the company has compounded free cash flow per share at 12% per year on an unlevered basis. Accenture has continued to compound at a high rate due to growing IT spending, increasing IT outsourcing and consistent market share gains. Loeb expects accelerating revenue growth from the high single digits to the mid-teens in the coming years and accelerating free cash flow per share, rising from the low teens to about 20% or better.
He noted that last year was a “highly productive” one for new Intel CEO Pat Gelsinger. Although Intel shares remained weak in 2021, Loeb sees a “compelling, underappreciated fundamental story.” He said the chipmaker’s brain drain was a significant part of their thesis when they started trying to help it deal with its long-term underperformance, and this issue appears to be reversing.
Loeb also likes Intel’s investment plan, which includes a new fabrication plant in Ohio and the acquisition of Tower Semiconductors. He believes Intel is well on the way to recovery amid returning talent and an improving product line-up.