We are experiencing the biggest sell-off in (growth) stocks since the credit crisis in 2008/09 and the Dotcom crash in 2000/01. More than 45% of the Nasdaq’s stocks are down more than 50%. Shopify, one of our larger positions, is down 67% in 2022. Spotify is down 55% and even Alphabet and Amazon, powerhouses with enormous earnings power, are down 19% and 27% respectively.

Meanwhile, the portfolio companies have reported solid 2022 Q1 earnings updates, especially given the challenging period, and the outlook remains good. We largely own the same businesses as in December 2021. We sell businesses when there are red flags that would indicate a material negative impact on long-term earnings power. So far, we have not seen such evidence related to our businesses.

We understand that people are confused by various tectonic shifts; rising inflation and interest rates, labor shortages partly driven by the emerging creator economy, geopolitical tensions, cyber threats, Apple’s IDFA changes, the transition from the pandemic to an era in which digitalization is still accelerating, the enormous impact of AI on society, changing business architectures driven by migration of workloads to the public cloud, supply chain challenges, and so forth.

Many of the world’s current problems are our businesses’ opportunities. For Cloudflare, Snowflake, and Crowdstrike, to protect data and enable efficient information intelligence for governments and enterprises. For Shopify and Spotify to enable entrepreneurs and creators to monetize their brands, to be discovered, and all that for lower costs.

We do not know when and where prices will rebound. Such major market drawdowns can easily last 12-18 months from the start (November 2021). Until that moment, valuations are not just declining because prices come down yet also because the businesses are growing.

In hindsight, it would have been great to sell all stocks in October and come back these weeks. However, dancing in and out of core investments is likely to be an inferior strategy going forward and not a game we will ever play. When dealing with scalable internet-enabled businesses, the biggest challenge going forward will be to be comfortable owning thriving companies at full valuation and through multiple swings in the price of the stock.

These mark-to-market losses are painful. The risk of a permanent loss of capital is largely determined by the investor’s horizon, and we have always made it clear that our horizon is at least 3-5 years ahead. This sell-off also provides a rare opportunity for those with the right mindset and horizon.

Finally, let me end by sharing this essay by Kevin Scott, CTO of Microsoft, about the progress in AI and the definition of ‘work’. Generative models such as Dall-E2 (a new AI system that can create realistic images and art from a description in natural language) and PaLM (Pathways Language Model) are becoming powerful and will have an impact on society. It is relevant because some of our businesses are leveraging these innovations to build better products.

Hold on.

Georg