Coatue’s View of the Market Is Cautious But Still Optimistic about Good Firms Long-Term

A report from Coatue ran across my desk recently and I thought it would be interesting to those looking for another view of the economic situation. If you haven’t heard of Coatue Management, they are a global investment fund manager who managed about $73 billion last year.

Their take is as follows:

First, the market can give off false positives pretty often on the way down, so don’t be fooled (witness there were several rallies even in the year of the 2000-2001 tech meltdown).

Second, just because overvalued tech startups are the first to feel the pain in a downturn, doesn’t mean that when these companies flush out that the downturn is over. There is probably more to come just behind this.

Third, the market is still failing to differentiate between good and bad companies. This point in particular I thought was interesting which means that we may barely be at the beginning of this downturn.

One data point they surface to point this out made me laugh a little bit. They compared Wayfair to Shopify saying that Wayfair stock is off 84% off its high, but it’s revenue declined 20% year over year, and Shopify stock is off 79% of its high but has over 20% growth and is profitable. How do both of those make sense in the same market?

Their point is that everyone is just trading on macro-trends, not on individual stocks.

Fourth, Coatue feels that about $1 trillion dollars in value could go missing from the startup and IPO market. This contradicts the statement from some other players out there that VCs are sitting on a lot of cash just waiting to deploy.

Coatue outlines the 3 potential paths forward for the economy, let’s play them through here.

One path is an optimistic V-shaped recovery. The firm assigns a very low likelihood to this outcome primarily because the run-up was based on a surplus of money and overinflated earnings multiples across the market.

Another path is a Soft Landing. This is certainly possible. This view holds that the Fed is on the right track and this is potentially transitory but things will not return to the previous normal.

The final path they outline is what they call a Hard Landing. This they give the highest probability. If high inflation is sustained, it will cause a lot of damage to the consumer. On top of this, if geopolitical risks escalate and the Fed overshoots by raising interest rates too high, this could be a simple recipe for a recession.

To wrap up, I am most encouraged by the data that the market seems to be trading mostly on macro-trends and not individual stocks. This means if your fundamentals are good, things could bounce back for you in the next year once investors come back to their senses and there is a flight to safer companies.