FadeTwit

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Welcome back!

We’re going to examine something called “FadeTwit” today – here’s the essence of what I mean: I’m referring to Finance Twitter “FinTwit” generally getting overly bearish and piling on negative sentiment that ultimately skews too far. It usually ends up being an incorrect assessment over the medium term, even if there’s significant short term pressures that make the view “correct” over the short-term. This includes companies, but you could also say it applies to crypto, which seemingly keeps ebbing and flowing like the triple-levered Nasdaq. We’ll leave the crypto side of the equation out of this and focus on the companies for the most part.

I’m pretty sure the phrase was coined by Masa Capital so we’ll give credit to him. Hopefully, “FadeTwit” becomes a way to identify when people are being overly bearish, or drinking too much of the kool-aid. I’m excited for this, let’s dig into the biggest examples of Companies that FadeTwit got wrong:

As a reminder, this is not financial advice and all conversations discussed in this newsletter are informal in nature.

Meta

It’s crazy how people faded this one – as a massive Instagram user I obviously didn’t, (invest in what you use every day right) but people forgot the basics of this business. A lot of the issues META was dealing were SELF INDUCED. They elected to load tf up on Capex – this wasn’t a “oh wow there’s no more FCF anymore forever story”, but even at cheap multiples not a lot of people pulled the trigger.

Meta’s “year of efficiency” was ultimately crazy effective. Once they got rid of ZIRP era comfort, they fought hard to drive operating improvement and rip their equity value back up. Apple’s privacy worries were also well overblown as well.

This was a prime “Inverse Cramer” moment too – Cramer was crying about META at the lows.

It’s very hard to bet against the incumbent social media platform especially when they have a track record of taking the best features from other apps (TikTok and Snapchat) and seamlessly just integrating it into Instagram and Facebook.

Netflix

I’m sure we all remember this – back in the spring of 2022 we suddenly decided to give up on Netflix.

There were a lot of headwinds Netflix was dealing with at the time. They reported their first ever quarter of subscriber loss, they were spending boat loads on garbage content which led people to question FCF generation over the LT, and they were looking into restricting password sharing.

In 2020/2021 a lot of content was leaving Netflix too. The Office for example was a Netflix and Chill staple, but with every linear TV company creating their own streaming platform, The Office went over to Peacock; and was an example of many shows that went back to their Parent Cos of Disney, Warner Bros, Comcast, and Paramount.

However, people framed this whole argument wrong. The restricted password sharing led to an increase in users and ultimately higher rates were hurting every other streamer much worse than Netflix. All those sub-scale, unprofitable streamers were at a competitive disadvantage relative to the heavyweight Netflix.

Now we’re back in the crazy world where these platforms are electing to license back to Netflix. Look at all the OG HBO content on Netflix now and look at how Suits randomly blew up into a widely popular show due to the Netflix algo.

As we look to recreate the cable package (but with streaming), Netflix looks like the new “incumbent” while the rest of the industry is trying to race to profitability or consolidate.

MicroStrategy

Okay, okay so we’ll talk about the crypto companies people negatively piled onto.

If you were looking for a levered bet on Bitcoin without buying Bitcoin, this was it. MicroStrategy (MSTR) is a small software company in itself, but with CEO Michael Saylor using all cash and financing options he can get his hands on to hoard bitcoin (regardless of the pricing) this meant that if bitcoin rallied again, he would be a massive beneficiary. With bitcoin up significantly and MSTR regularly able to tap the capital markets, anyone who bought some MSTR near the lows is looking at a 10 bagger return in short order.

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Coinbase

This should’ve been a little more obvious in retrospect. Given FTX went down after SBF’s fraud, and pretty much every other crypto exchange had liquidity or solvency issues, it should’ve been obvious that Coinbase is the best option at the time for retail crypto enthusiasts (excluding not using an exchange at all). Coinbase has ripped up 624% since the lows. The question now of course is whether fees can stay this high and if investors will just elect to buy a Bitcoin or Ethereum ETF instead of investing on Coinbase. That remains a TBD.

Carvana

I’ll be the first to admit I got this wrong. Carvana got pummeled from its peak, but has rallied significantly and proven to be a multibagger for any opportunistic bottom buyers. The key catalyst was having a lender group that teamed up for a favorable restructuring that is primarily PIK based financing, giving Carvana a longer runway to try to become profitable and to not have to deal with higher interest expenses. This deal, led by APO, was a massive win in stabilizing the business and invigorating a 1,700%+ rally. Will Carvana be a viable business and have a viable capital structure down the line? I’m not sure, I’m still not constructive on the underlying business, but sometimes in levered credit the best catalyst you can have is a longer runway that allows you time to turn things around.

Nvidia

I know this sounds crazy, but FinTwit used to be very bearish on Nvidia. A large number of people thought data center revenue would crater, but instead we got an AI related surge…Just like that, the rest has been history, with Nvidia carrying the AI rally.

There will be a time to be bearish Nvidia again…I certainly believe that, but braver men than I will call that top and call when Semis and AI beneficiaries should start to normalize.

I am a little concerned seeing tweets like the one below though…

Match

FinTwit seems to have an affinity for Match despite its shortcomings. It’s a good example that you can’t turn every type of business into a tech company. For some reason though, FinTwit continues to gravitate towards Match while every other similarly sized company seems to outperform.

While Elliott is in the mix now, dating site stocks like Match and Bumble have underperformed heavily.

There seems to be a consensus among older investors that “All the kids are on the apps now a days” without recognizing a) a lot of people don’t need the app to date b) apps can be a highly frustrating experience for some ppl and they’d rather meet people other ways c) just because you’re on the apps doesn’t mean you need to pay for them and d) these are naturally high churn offerings.

Who knows though, maybe the initial enthusiasts have cleared out by now and now the consensus bears can be faded.

Honorable Mentions: BABA, PYPL, ARM.

BABA is marketed as “The Chinese Amazon” but obviously hasn’t lived up to those expectations. BABA has been a consensus long on FinTwit but it doesn’t seem like that’s worked out well. Meanwhile, PayPal was a former payments darling that has been dealing with pressure across the board from Apple Pay and FinTechs. While the Company has been mocked recently for the new CEO’s “We’re going to shock the world” comments, FinTwit has largely turned from loving PayPal to starting to roast it.

Like most SoftBank backed companies, ARM was met with skepticism from FinTwit. But with better than expected results combined with an AI boom, ARM has more than doubled from it’s IPO valuation.

Situations where “FadeTwit” seems to work:

However, not every FadeTwit idea is a total bust. Usually, the exception is when there’s high fixed costs combined with unprofitability. While Carvana was able to get a favorable restructuring and still has good growth prospects, there’s a couple examples that FinTwit got right:

Peloton

We don’t need to recap Peloton fully, but obviously the need for stationary bikes decreased significantly once everyone was done working from home 5x/week. Peloton brutally overestimated future demand prospects and has been in a nose dive since.

Don’t worry though, Private Credit is on the case. Some direct lenders are taking a look at Peloton, evaluating a $750mm Unitranche loan to pay off part of Peloton’s $1B convertible bond. Last week though, it was reported that Peloton is among retailers that have been late in paying vendors over the last year.

WeWork

We all know the story about WeWork and the mad man nature of Adam Neumann (who is bidding on buying WeWork out of bankruptcy). WeWork filed for bankruptcy last fall and is trying to figure out the best path to emerge. While covid and changes in the way we work hurt results, the business was fundamentally broken and a mismatch of liabilities and income. By that, they’re matching short-term lease payments from tenants with long-term lease obligations from renting the real estate. Not a great combination if you have a shortfall in occupancy and hence, another example of “fixed cost” businesses being a correct FinTwit fade.  

EVs

By this I mean mainly Rivian and Lucid, since obviously the big run up in Tesla was missed by a lot of people due to 1) ppl underestimating the insane multiples they got at the peak and 2) ppl letting their dislike of Elon get in the way of their investment decisions. Even though Tesla sales projections are coming down, the Company scaled significantly relative to what it looked like back in 2019.

People were calling it ridiculous when Rivian went public at a $100B valuation in November 2021. The market was subsequently not kind to them over the past couple of years. Even with the cash burn, recent financing raises, and $9+ of cash equivalents on the balance sheet, it’s likely Rivian will need to tap the capital markets in 2-3 years. It’s estimated that Rivian is losing $32k+ on each vehicle it sells. Rivian is now down -92% from all time highs 💀 

Additionally, Fisker, an electric vehicle company, is mulling bankruptcy, while Lordstown Motors, another EV company, filed for bankruptcy last year.

This CNBC article highlighted how large automakers are scaling back EV goals as well.

There’s still longer term tailwinds for EVs to be successful, but the current high fixed cost, ramp up environment is not favorable relative to the current demand trends and the lack of EV friendly infrastructure.

This was going to be a “What could be next?” section, but in spectacular fashion…a stock that FinTwit has hated on has since recovered.

I was initially writing about Google.

Funny enough, I was initially sparked to write this piece once Google had been knocked down to the 130s range. Since then, it was announced that Apple and Google are in talks to integrate Gemini AI into iPhones. So the recovery in the Google thesis has started to play out, up 16% from the lows a month ago.

As we know, Google has naturally dominated “search” and searching for something online is appropriately framed as “googling” something. But with Chat GPT coming into the fold, there’s been worries that searchers can gain a more helpful and relevant answer through Gen AI offerings. This coupled with a terrible Gemini demo pressured the stock several weeks back.

While you can view Google’s failure with Gemini as a bearish indicator, you can also view it as a “wow imagine how things can improve when they clear out the reasons for this happening”. You got this vibe when you saw Google Co-Founder Sergey Brin come out of nowhere and host a coding sesh with a bunch of senior Google Execs.

Part of the thesis was this – we all know all these tech companies are overstaffed and bloated. Not a lot of people want to say the quiet part out loud. You can probably gain significant efficiencies by cutting headcount in a fashion similar to Meta. The thesis was also centered around the idea that if Google can pivot into a “war time” culture and fight harder to maintain their relevance in search, then maybe value will return.

I snoozed and you lose with getting this piece out fast enough though! But hey, at least there’s a real playbook to be had here with identifying when sentiment is overly bearish and there’s a brief dislocation!

Conclusion: Investing types love framing bubbles as nearing its end when their Uber driver (or historically shoeshine guy) were talking about stocks. Sure, your Uber driver is probably less sophisticated about stocks, BUT maybe we’re too harsh on Uber drivers and don’t recognize when we get caught regurgitating the same theme everyone else is regurgitating. This happens every time crypto assets rally, or when they fall. This also happened during peak inflation and 2022/early 2023. That was a great time to buy the dip, but there’s plenty of receipts out there of the vast majority of people panicking and worrying about an imminent recession.

Remember back in October 2022 when there were 100% odds of a recession within 12 months? That should’ve been a sanity check for us all, myself included obviously.

If you find yourself getting pulled into an overwhelming consensus, take a step back, relax, and think about whether you’re in another moment where you need to fade everyone else.

If you see any examples of “FadeTwit” – please tag me and lmk! I want to assess whether I should be fading everyone else!

That’s all for this edition.

Until next time.

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