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Wedgewood Bearish On Facebook, Bullish on Apple and Google

Faizan Farooque

Wedgewood Partners, a St. Louis, Missouri-based investment firm, released its 2019 Q3 investor letter – you can download a copy here.

Wedgewood Partners managed a 0.39% return for the quarter. Meanwhile, the benchmark Russell 1000 Growth Index and the S&P 500 Index gained 1.49% and 1.87%, respectively.

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Wedgewood offered a bearish take on social media giant, Facebook Inc (NASDAQ:FB), in its latest letter to investors:

"Facebook reported 32% growth in constant currency ad revenue, along with expectations for 50-55% growth in expenses as the Company continued with their telegraphed plan to accelerate investments in privacy and security across their social platforms. The Federal Trade Commission (FTC) also approved a $5 billion fine for violating a 2012 FTC order by misrepresenting users’ ability to control data privacy. While this removed an overhang dating back to early 2018, continued pressure from politicians and regulators kept Facebook’s earnings multiple in check."

Meanwhile, Apple Inc. (NASDAQ: AAPL) and Alphabet Inc (NASDAQ: GOOGL) were top performers for the investment firm in the quarter.

Our calculations also showed that AAPL is still loved by hedge funds, ranking 11th among the 30 most popular stocks among hedge fundsAAPL was in 95 hedge funds’ portfolios at the end of the second quarter of 2019.

Meanwhile, GOOG was the 5th most popular hedge fund stock but Alphabet Inc was the most popular company among hedge funds, as of June. Wedgewood Partners said the following about Apple and Alphabet in its letter:

"Apple grew revenues 4% constant currency, driven by 18% adjusted growth in its services business which has generated nearly $45 billion in revenues over the trailing four quarters, and 50% growth in wearables and accessories. We expect Apple’s consolidated revenues will accelerate over the next 12 to 18 months as they complete the development of 5G-capable mobile devices. Despite a quickly growing, high-margin software franchise, Apple continues to trade at undemanding earnings multiples.

Alphabet also saw revenues accelerate across their key advertising business (Google), in addition to rapid growth in their cloud services business that the Company sized at a $2 billion per quarter revenue run rate. Compute and data analytics drove Google’s cloud acceleration, which we estimate is growing faster than Microsoft’s Azure and Amazon’s AWS offerings. As Google’s advertising business stabilized, and with Google Cloud services now driving a more meaningful portion of revenues, combined with a massive cash balance and undemanding multiple, we added to our Alphabet position to take portfolios about 250 basis points overweight relative to the benchmark."

Interestingly, apart from Facebook, the hedge fund is not long on any other social media stocks such as Twitter Inc (NYSE: TWTR) and Snapchat (NYSE:SNAP).

Facebook has been a staple among hedge funds for a long time and was the #1 most popular stock among the 743 hedge funds tracked by Insider Monkey was Facebook Inc (NASDAQ:FBat the end of June 2019.