'A recipe for permanent loss of capital': A $3.4 billion hedge fund is lashing out at tech stock valuations (AMZN, FB, GOOGL)

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• Tourbillon Capital is a New York hedge fund that manages $3.4 billion.
• The fund told clients its concerns over popular stocks such as Amazon, Facebook and Google.
• Tourbillon also hinted at a potential sell-off for tech, media and telecommunications stocks.

A $3.4 billion hedge fund is poking holes in conventional thinking over tech behemoths Amazon, Google and Facebook – and hinting at a potential sell off in the sector.

Tourbillon Capital, a New York-based hedge fund, raised concerns over investment theses on the companies in its second-quarter client letter, which was reviewed by Business Insider. Broadly, the market is pricing in indefensible valuations for the tech, media and telecommunications sector, according to the fund.

"Today, we see less and less differentiation on future fundamental performance, fewer defensible valuations, and a market that is lulled into a sense of complacency based on narratives," founder Jason Karp wrote in the letter. "That has historically been a recipe for permanent loss of capital."

Karp reflected on another investor's analysis about how unlikely it is for Amazon to consistently grow revenues at a 15% revenue compound annual growth rate. From the letter (emphasis added):

"Michael Mauboussin highlighted the importance of the “outside view” when reflecting on a recent cover of The Economist, which then describes how analysts expect Amazon to have a 15% revenue CAGR for the next 10 years. An outside view would ask, “How often has something like this happened in the past?” His team’s internal research shows that since 1950, ZERO companies, once they reach a certain level of inflation-adjusted revenues, have successfully grown revenues at that rate for that period of time. While we are not saying Amazon will fail to achieve the market’s expectations, we agree with Mauboussin that investors should appreciate how much of an outlier they are betting on."

Karp also raised concerns about Facebook and Google, and how revenue growth projections are impossible to achieve. Karp said that the companies' share of the US advertising market stood at about 28% combined last year. However, current rates of revenue growth for the companies imply that the two would comprise 120.5% of the total advertising market in five years time. 

"We think taking the outside view in this way is worthwhile in highlighting flaws in the growth projections that many investors in these companies are not even thinking about today," Karp said. 

Meanwhile, Karp also raised concerns about the rising valuations of the tech, media and telecommunications sector.

"Between the crowding, the coiled spring created by aberrant low volatility, the factor-driven return profile, the valuations of the stocks and related factors, and extreme implicit fundamental assumptions underpinning the narrative of consensus TMT stocks, we have the elements in place that have defined many of the post-recession sell-offs," he wrote.

The fund plans to "remain selective" in the sector and position itself to "play offense if and when the vast majority of the market will be in a position of defense," he added.

Tourbillon's Long Alpha fund is up about 13% through July of this year, while its TGMF long-short fund is down about 2% over the same period, a person familiar with the numbers told Business Insider. By comparison, the S&P 500 delivered 10.4% over the same period. Last year, TGMF dropped -9.2%, according to investor documents previously reviewed by Business Insider, compared to a 9.5% gain in the S&P 500.

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