Different Investment Horizons—and How a Downturn Changes Investment Thinking

Silicon Valley 101 — S3E89. Earlier episodes looked at this economic cycle and the sharp fall in technology stocks through the lens of Silicon Valley, its startups, and its venture capitalists. Episode S3E89 changes perspective to examine how Wall Street investors see the situation and share prices. (Look it up if you are interested.) One observation is particularly interesting. Unlike most technology giants now run by professional managers, Meta has its founder, Mark Zuckerberg, as its current CEO. This allows Meta to keep investing resolutely in the metaverse regardless of losses, unaffected by outside investors’ calls to cut back. Wall Street investors, however, are not buying the story. The metaverse’s eventual shape remains uncertain. If Meta is determined to proceed while that uncertainty persists, investors can instead buy upstream businesses such as chip companies and cloud-server providers. If the metaverse really becomes viable and gains momentum, there will still be time to invest in Meta. Episode S3E89 discusses many profitable business models and emphasizes free cash flow. Investors have become more cautious about burning cash to gain market share. Scaling back operations, preserving cash, and waiting for better economic conditions before investing again are Wall Street’s mainstream approach in this environment. Meta says it will keep investing in the metaverse without wavering, and its share price plunges 20%. Intel cites uncertainty ahead, announces workforce reductions and major capital-spending cuts—including a US$10 billion reduction in 2025 capital expenditure—and its share price rises 10%. --- This brings me to investors’ differing time horizons. Wall Street investors often look less than a year ahead. For example, Meta says it will maintain the same level of metaverse investment through 2023, and Wall Street investors reject it because improvement would not arrive until at least 2024. Venture capitalists, by contrast, generally invest with a three- or five-year horizon and can accept investment in the next future opportunity. After all, Meta’s track record is not bad. When Facebook first listed, people questioned whether it could shift its business model from desktop/PC to mobile. It proved that it could. Its acquisition of Instagram also gave it another social platform through which to connect with younger people. One issue is differing time horizons; another is how economic conditions change investment thinking. In good times, investors can generally accept investing in the future. When conditions reverse, they become more concerned about short-term returns—or whether a company can survive the short term. When the economy is strong and money is plentiful, Wall Street investors think long term like Silicon Valley VCs. But when conditions turn sharply worse, Silicon Valley VCs begin thinking short term like Wall Street investors, paying more attention to business fundamentals, profitability, free cash flow, and the company’s survival.