Snap Inc's (NYSE:SNAP) disappointing results are a bad sign for ad spending in the internet space and one fund manager is positioning accordingly ahead of big tech earnings this week.
"Right now, we have more shorts than we do have longs in the portfolio, and we think this is going to be an ugly week for fundamentals and potentially stock prices as well," Satori Fund founder and portfolio manager Dan Niles said Monday on CNBC's "Closing Bell."
What To Know: Snap's warning on ad spend impacted several names in the digital advertising space, but Niles believes the ripple effect should have extended even further.
He told CNBC that he is short several cloud names ahead of earnings, including Microsoft Corp (NASDAQ:MSFT). He also mentioned Amazon.com Inc (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG). Niles didn't explicitly say that he was short Amazon or Alphabet, but he suggested that weakness is likely on the horizon.
"When Covid happened, everybody's business went to the cloud. Everybody had to order online. That's the only thing you could do and so that really benefited the cloud services providers like Microsoft Azure, Amazon Web Services and Google Cloud Platforms," Niles said.
"Nobody's anticipating any problems from the big three cloud service providers, and what we're concerned about is you might actually see some issues because the utilization or need for cloud services goes down if people aren't spending as much time on the internet."
See Also: Amazon.com To $170? Plus This Analyst Lowers Price Target On Meta Platforms
Niles believes the earnings multiples of said internet companies are too high.
"Growth on the internet for consumption is slowing down, and that should concern you when you've got multiples this high," Niles said.
Again, he focused on Microsoft, noting that it has a price-to-earnings multiple around 26 versus the S&P 500, which is trading around 17 times earnings. Niles also noted that he has some short positions against the chip stocks, but he didn't specify which names.
What About Apple? When asked about Apple, Niles told CNBC that the company faces a lot of the same issues, including trading at a premium to the market. Apple's price-to-earnings multiple is around 25, according to data from Benzinga Pro.
Apple is another company that benefited from the pandemic, he said, adding that the company grew revenue by just 2% in 2019, compared to a jump of more than 20% last year.
"People are still looking for 6% or so growth this year and I think it wouldn't surprise me, whether it's this year or next year, for that growth to go negative," Niles said.
Microsoft and Alphabet are set to announce earnings after the market closes today. Amazon and Apple are scheduled to report after the market closes on Thursday.
Photo: courtesy of Microsoft.
