Why Did Michael Burry Buy Liberty Interactive? Michael Burry is recognized as one of the world’s leading hedge fund managers. He enjoyed massive success predicting the subprime mortgage crisis of the late-2000s, and after his “big short” paid off, he’s been lauded as a maverick investor ever since.
But despite his reputation, Burry’s trading style is actually fairly orthodox. He’s a value investor in the tradition of Benjamin Graham, and looks for stocks with a large margin of safety. In other words, he tries to buy companies underappreciated by the market, holding onto them until he’s ready to sell at a profit.
Of course, Burry has also been known to make some daring calls from time to time. But even those are usually based on solid research and careful analysis. So while he may be a maverick in spirit, his investment strategy is thoroughly mainstream.
Given this background, it’s no surprise that Burry has cultivated a keen sense for the value play in all manner of economic conditions. Indeed, classical theory suggests that stocks that trade at a price below their fair value make for wise investments during periods of commercial uncertainty.
The thinking goes that these “cheap” companies have solid foundations and are more likely to rebound when things recover. In addition, earnings and free cash flow (FCF) tend to be more resilient for this type of business too, making them better equipped to weather oncoming financial storms.
Of course, there’s no guarantee that a stock will rebound, but those with strong fundamentals and a history of surviving downturns are generally considered good candidates for success.
This kind of thinking seems to be behind Michael Burry’s recent purchase of Liberty Interactive. The company trades on the Nasdaq Stock Market under the umbrella of Qurate Retail, Inc., and provides digital shopping platforms to both consumers and merchants. Its main subsidiaries include e-commerce businesses such as Zulily, QVC, and HSN, as well as a video streaming service that hooks-up users with access to a wide variety of lifestyle and entertainment content.
But off the back of a brutal sell-off, is there anything Burry can salvage from this much-maligned enterprise?
Source: Unsplash
What Does Burry See In Liberty Interactive?
Qurate Retail Group badly underperformed the S&P 500 this year. Its shares fell roughly 70% in 2022, while the SPDR SPY ETF declined just 10%.
However, the company isn’t unaware of the difficulties it faces. In its latest third-quarter press release, QRTEA admits that “weakened consumer sentiment” has led to what it claims are “soft results” for the business.
And yes, a quick glance at the numbers doesn’t inspire much confidence. Liberty’s constant currency revenue dropped 9% to $2.7 billion, with e-commerce sales – which account for 62% of its top line – falling 13% to $1.7 billion.
On a brand-by-brand basis, things look even worse. Takings for the QVC International segment tanked 21%, while Zulily saw its revenues plummet 39%.
But what’s especially worrying is the fact that Qurate appears to be lagging behind broader developments in the space. Indeed, its core offering has become less compelling when viewed against the popularity of new media outlets, and the sheer scale of online digital shopping platforms has significantly eroded QRTEA’s preexisting business moat.
The firm’s profitability metrics seem to reaffirm this loss of competitiveness, as the company’s adjusted operating income nosedived 57% to $185 million.
That said, there’s still a lot for investors to get excited about. The company’s Project Athens – a three-year, three-phase action plan focused on reestablishing margin expansion, revenue growth and cash flow generation – is starting to deliver rewards.
For instance, Liberty’s managed to sustain positive FCF despite the recessionary setbacks it’s had to deal with, while its forward non-GAAP PE ratio is excellent for the sector at just 6.1x.
Moreover, the firm reached over 200 million homes globally in the last twelve months, increasing its monthly active users by more than 41% sequentially in the previous period.
Can Liberty Turn Things Around?
As digital platforms continue to grow in popularity, the way that customers shop is evolving. This poses a threat to legacy TV retailers, which have long relied on older methods of selling.
In fact, one of the most serious changes is the rise of so-called “influencers.” Younger consumers are increasingly turning to Instagram and other social media platforms to find product recommendations, and these influencers often have more sway than traditional advertising.
Considering that Qurate describes its average customer as an affluent person in their low 60s, this could be a problem in the future.
Furthermore, another shift that’s happening is that new shopping platforms are emerging that cater to the needs of digital-savvy shoppers. These platforms are often more convenient and user-friendly than conventional retail websites, which can be off-putting for younger consumers.
However, monthly retail spending for those aged 18 to 24 increased slightly in the July quarter for QVC and HSN, suggesting that these trend predictions might not spell doom and gloom after all.
Why Did Michael Burry Buy QRTEA? Conclusion
There’s little doubt that TV retailers like Qurate will need to adapt if they want to stay relevant in the age of digital shopping. This means embracing new methods of marketing and investing in user-friendly e-commerce platforms.
Michael Burry has gambled $10 million on Liberty Interactive doing just that. Whether his bet pays off remains to be seen – but investors with less confidence in the business should think twice about following his lead.
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