Why Stocks Corrected + Second Quarter Tech Earnings — ft. Mark Mahaney

25:50Is that why we're seeing these drawdowns, despite what looks like, based on what we're seeing in your description, pretty solid earnings? Well, I think there are two issues. I do think there is this risk. about that we're going through a hard landing. And even these companies that I mentioned that haven't seen it yet, maybe it's still coming. Maybe it's next quarter where there's going to be confession period. And yes, we finally see the weakness. So it's a risk. It's an overhang. And yeah, you had weak jobs numbers. You get two or three months of those. I mean, we could go into recession. And you get an external shock.

26:27I mean, the economy's probably at a point that you get another external shock like we've had with Ukraine or COVID. Yeah, we could go back into recession. You know, wouldn't be that hard to see that happening in a month or two periods of time. I don't think it'll happen, but that's, you know, then you're betting on external shocks. But anyway, that's one thing. That's what's caused these stocks to trade off. And then the other one is AI. And then, you know, we know that there's massive amounts of money being spent by these companies, Microsoft, Amazon, Google, and Meta. I mean, combined, I've lost track now.

26:55It's$180 billion in CapEx. It's some monstrous number like that. Are you sure you're going to get a return on all that CapEx spend? ROAI, is there such a thing as ROAI? And there better be. The good news for NVIDIA is that its four biggest customers are Microsoft, Amazon, Google, and Meta. The bad news for NVIDIA is if those companies don't get a return on AI, then who will? And then that customer concentration could really blow up in their faces. And it's kind of hard to sit here and convince you that people aren't getting a good return on AI. But I will make one strong argument, and I feel strongly about it related to Meta.

27:37Look what Meta's done the last three years. Three years ago, Meta's stock was in the tanks, like truly like 90 bucks. And where are we now? Meta's at 500. Wow, what a recovery that was. But it was in there because their ad tech stack got blown up by Apple privacy changes. and it looks like their user growth and their usage growth or engagement growth had really just kind of hit a wall. And that's not where we are now. We did almost 30 % revenue growth the last two quarters. I mean, at this scale, that's really impressive. And there's now growing their users like 6%, 7 % year over year engagement is rising.

28:11And you know what's driven that? It's been AI deployments. I think this company went back in, rebuilt their ad tech stack. It took them a year or two to do it, but they did. And all the advertisers, most of the advertisers I talk with and the ones you can too, will tell you that their return on ad spend on meta is better now than it was last year or two years ago. And then users are spending more time on meta, on Instagram, on Reels, on core Facebook. The company turned from a social company to a media company in terms of the content that's in your newsfeed. And they used AI to do that. It required a lot more compute.

28:47a lot more storage. It was very expensive, but they've already gone through one AI cycle. And I think sometimes people forget that. So I think there is an example of where you can get great ROAI. And Meta, to me, is example, exhibit A. The market doesn't agree with me on that completely. So, you know, that's why the stocks have traded off. I love that term ROAI, and it's kind of what we've been focusing on for the past several weeks. What do you think general sentiment on Wall Street is about ROAI. And I ask that because we have seen these pretty strong earnings. And then it feels like every headline, it says, but spending was up and shares slid.

29:29Is it just a generally negative, is there just fear around ROAI that the return on AI isn't going to be high enough? Or is it a little bit more optimistic than I'm portraying? No, no, I think you've captured it, Ed. That's the fear in the stock. And it gets a little bit worse because you know what the spend is, you know what the investment level is. These companies are telling you what their CapEx is, and you got to wonder how big is depreciation going to get. And at the same time, then there's a little bit of concern over, well, maybe if we're going to head into a hard landing or a recession, then spend's going up, but then revenue is going to come down.

30:05That's nasty. So that's like the double whammy on stocks. And the higher the multiple, the greater the fall. One of the advantages you have with meta, which hasn't really traded off that much or Google is that, you know, they start off trading at 18, 19, 20 times earnings. So it's not like this is, this is not like, you know, 15, 10 years ago when these things were trading at 30 to 40 times earnings with a lot more room for downside. There's just a lot more valuation protection. I don't mean to sound so bullish, but, you know, I generally am. And I look for these kinds of dislocations. I think they're generally great opportunities to buy stocks, but that's the concern.

30:42What you said is the concern in the market, which is all I don't know whether there is, this is the market speaking. I don't know whether there really is ROAI. I just know that CapEx numbers are rising dramatically. And I hear we may be going to recession. That means revenue is going to be falling. Whoops. I want out of that. So Mark, we've known each other a while, and there's always a few companies we like to talk about. And one of them was, everybody talks about Meta, but kind of the little social company that could or couldn't, if you will, Snap. And as long as I've been following Snap, it seems to have this cycle between kind of 8 and 16.

31:168, 16, people get excited. You know, at one point it hit 80. But generally speaking, it trades in this range. I think that's quite innovative, or they're quite innovative. I think they've got a nice, decent audience or an audience that advertisers like, specifically young people, and just anecdotal evidence. I see my teenage sons use it as their primary messaging app. Just curious to get your take on Snap. And then I want to move on to talk about the company you and I used to talk about a lot, Spotify, which seems to be finally having its day in the sun. So Snap. Snap, I think, doesn't give you much of a read into the broad market.

31:49So just let's make sure we put all this stuff in perspective. They do. I forget,$3 to$4 billion in ad revenue. So, you know, that's versus$150 billion for Meta,$250 billion roughly for Google. Like, you know, if you're looking for signs of recession, don't look at Snap. Look at the two bigger companies to see whether things are getting better or worse. There's also something else that comes with being Snap. Like with Pinterest, you're a small ad tech platform. There's no advertiser out there that's going to first advertise on Snap and then decide whether they're going to spend any money on Google or Meta.

32:20They're going to first spend money on Google and Meta and then maybe spend money on Snap. So it's always had that risk. Scott, you talked about innovation on Snap. And look, it has it from a user perspective, but the innovation, there's two audiences here. And the innovation on the advertiser side has always been kind of middling. And sometimes it's been pretty poor. And so that's the problem with what Snap has. It doesn't have anywhere near the reach and frequency of the two massive platforms. And then, oh, by the way, you can throw in Amazon. That's a much bigger platform. And by the way, you can throw in TikTok.

32:53And now Microsoft is an ad platform is two times bigger, I think, than two or three times bigger than Snap. So that's the challenge that Snap faces. They can monetize better, but they just need to innovate better on the advertiser side. Their innovations on the user side have been great, but not on the advertiser side. And it's hard enough being a small ad platform in a world of giants. It doesn't help that you're a small ad platform that hasn't innovated well. So look, as an investment, I've been on the sidelines on Snap for a while. I had to buy on it way back in the day, but it's been a while since I've recommended that stock and it's very hard to see how they can get out of this.

33:33And it could well be a nice trading vehicle, but I don't view it as an investment vehicle. So subscale and a weak ad stack, Spotify? That would fall into that exact same description as well. The good news for Spotify investors is that that's 10 to 15 % of their revenue and the the rest of the business is going through kind of two major inflection points. You know, this is, it's very similar in my mind to what Netflix did over the years. They kept improving the product, get better. It got better and better year in and year out at Netflix because they ended up getting more and more quality and the service got better and better distribution and more personalization, et cetera.

34:10And then once you build a value proposition, then you can start raising prices because your product is better. So you deserve to get raised prices and then feeds this flying wheel. Spotify, the same thing has happened. It's just, I don't know, six, seven years later than Netflix. And, you know, they've kind of run away with the streaming market. I've done annual surveys on this for eight years. The streaming market's gone to Spotify. There are more Spotify users on Apple phones than there are Apple Music listeners. And that's a captive audience. So that says something about how good the Spotify product is.

34:41And now they're going to market and saying, hey, please pay us for these great features that we kept adding over time, like podcasting, like audiobooks, pay us a little bit more for it. And most consumers are like, sure, a dollar or two more for the world's music and podcast and audiobooks library. What a deal. I don't know what that is, 30 cents a day. Yeah, sure. That's worth it. And they probably have more pricing power. So that's what's happened with Spotify. And at the same time, they've reached enough scale that gross margins, that was always the issue, You know, for the stock of Spotify have finally started to move higher.

35:15Investors saw that. And you can now it was safe to buy Spotify for the first time. You know, took four years after their IPO. Stock did nothing. Gross margins started to work. Price. They started to take pricing. And then investors, all of a sudden the coast was clear. And, you know, congrats to Spotify. They deserve it. And then the other company we tend to talk about a lot. And you were right. I was wrong. I don't know. I'm a big fan of Dara Kaspashaya. I wasn't a fan of the previous leadership. Your thoughts on Uber and also Lyft? Uber has to address two issues today. And that is, are they AV roadkill, autonomous vehicle roadkill?

35:54And is the consumer going to fall off a cliff? And they, I think, emphatically answered the second one, which is no, there's no slowdown at all in their delivery business or in their mobility business. Nobody's trading down across different cohorts. It's kind of hard to believe, but that shows up in the numbers. There's no deceleration in the growth rate. So give them the benefit of the doubt because there's no deceleration in the growth rate. And then so they addressed that. Now, this AV roadkill, that's going to be a real issue for a while. I don't think that's going to happen. I think Uber is so big.

36:25They are what would be called the demand aggregator. So as long as there's multiple AV companies, autonomous vehicle companies, then Uber is going to be in pole position. and there's going to be somebody, a Zeus, and then somebody else who's going to put their autonomous vehicles on Uber. And most consumers are going to, then consumers will decide. But I think you, Scott, and you, Ed, and me, we're going to open up our apps like everybody else. And we're going to decide we want to Uber Black, Uber X, Uber Comfort, Uber Green, or Uber Robo. It's going to be determined by, well, which gets to me sooner and which costs the lease, unless I have special use cases where I want Uber Black or something like that.

37:08And so I actually think most consumers, that's how they'll choose. They're not going to pay extra for robo. They'll do it one time. That's it. And anyway, to me, it gets to the point that Uber is going to be the demand aggregator here. So that's why there'll be a winner in the AV wars, which I think there will be AV wars in the future. I think it'll all be good for consumers. And it'll take a while for the market to realize this. But in the meantime, you can buy Uber. I think it's a really cheap price. That's today's debate. Scott, when you and I were talking about Uber in the past, the real question was, hey, can they ever make money?

37:40I mean, they went public with the biggest losses in recorded history. But the basic point you had to believe, and then you had to weather through a couple of years, and then you had to weather through COVID, which cut their business off at the knees, is can through scale, can they reach profitability and then material profitability? And the answer to that was, I thought was yes. And then it kind of got proven two years ago, and then they finally started generating positive free cash flow. And ever since then, it is just hockey sticked up the free cash flow. So I'll tell you what, Scott, I cover three mega cap names now, Amazon, Meta, and Google.

38:17And my bet is the fourth mega cap name I'll be covering, more than 500 billion market cap, is going to be Uber. Stay with us.

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41:04We're back with ProfG Markets. Do you see any company sort of second order impact that might benefit from this AI boom? Does Spotify, you know, able to do pull the same sort of trick that Meta has leveraging AI to improve their ad stack? Or do you see any kind of second order beneficiaries of this AI boom? Let me try a different interpretation. I think the market in the world is generally look for AI winners and it's kind of looked at the chip stack for the winners. I mean, can you buy enough NVIDIA? That's been the point of view of the last year. And I don't cover NVIDIA as a stock, but anyway, that's certainly been the market sentiment.

41:42And I liken this, Scott, not to the creation of the Internet and not to the creation of the automobile, but to kind of the rollout of broadband. if you remember 15, 18 years ago. And I just, just when I started in my career, I think it was 20 years ago. And so a few years into my career. And, and I remember that people at the time were saying, well, how do I, you know, this country, I mean, the world is going from narrow band to broadband and created a much better internet experience, much greater digital experience. And how do I invest against that trend? And people were, you know, buying chip companies at the time.

42:18They were buying networking infrastructure companies at the time, Cisco, They were buying cable companies and telcos. And my narrative, and I'm sticking to it, is at the time, I thought, well, why don't you buy the apps that people are using broadband to gain access to? Because your AOL experience, yes, AOL, and your Lycos experience and your eBay experience and your Amazon experience, they're all getting much better and they don't have to pay much for it. You know, like these companies are the major beneficiaries without having to do all the investments. That turned out to be kind of right. And so I use that analogy today, and I'll give you a very different perspective, which is that the content companies, so Matt and Google are at the top of this list.

42:59I mean, they're major beneficiaries because they can use AI to improve both types of content that they generate. First is user-generated consumer content, and the other is advertiser content. The fancy word for that is ads. So AI is making the ads that perform better that are on Meta. And actually Meta is using AI to automatically create ads for SMBs and consumers. We're just going to get more tools. I'm pretty certain that the change we're going to see in our Meta news feed is going to be similar to, I forget, it was seven years ago when we went from pictures to video on Meta. And I just imagine that in the next three to four years, we're just going to be wowed by some of the new creative that's coming that we get to see on social media platforms.

43:47TikTok could do this, too. But it won't just be, you know, like it'll be, I don't know, somehow jazzed up visual experiences that you couldn't have done without AI. So I do think that there are content companies that are great derivatives. And I don't think the market's quite figured that out yet. I may be wrong, but that's my point of view. And so in that content, I think Spotify, anything that's a content company that can deploy AI to make its content more entertaining, more engaging, more addictive, Spotify can do it, Netflix could do it, and is doing it. I think Meta and Google can do it too.

44:18One of the things I like about you, Mark, is that you make pretty bold calls. What's on your radar screen? When you're an analyst, you have buy and sell recommendations. What are your strongest buys right now? Well, so, you know, I wrote this book and I focused on this expression, DHQs, dislocated high quality companies. And I think there are 10 maybe high quality, really high quality companies that I that I cover, I think, kind of enduring good fundamental assets. And you kind of wait for them to get dislocated. All stocks get dislocated. And and the sell off may be creating one of those. I thought Google earlier this year was a great dislocated stock in the wake of the image generation controversies.

44:57I think Uber right now is a great DHQ stock because everybody thinks that the consumer is going to go south and Uber is going to, its business is going to get hit and their AV roadkill. So it's created a stock that went from 80 down to 60 and below 60. That to me, I want to buy Uber here. Now, I throw in another one, Shopify. Shopify, I think, is a very high quality asset. It's always been expensive, but that's pulled back a lot recently. And I think mostly over investment concerns, investment cycle margin concerns. So actually, that's one of the stocks I really like here. So those are kind of in my hit list.

45:34Amazon was not one of my top picks, but it sold off aggressively recently, I think from $200 down to$160. So off the top of my head, whatever that is, that's 15 % correction or something like that, 17 % correction. I think that the recessionary fears are overblown. I may be wrong. And if there is a recession, Amazon's going to be impacted. But if I'm right that those fears are overblown, this is when you buy Amazon at 160 rather than at 200. So that would be another one. And then if you want a crazy idea, Scott, I want to go down cap a little bit. I got a new surprise for you. Here's a small cap, less than 10 billion market cap that I think can go into large cap land.

46:13And I think it's actually an AI derivative. It'll be a positive AI play, although it's perceived in the market is AI Roadkill. And that's this language learning app, Duolingo, D-U-O-L. And, you know, I just, it's one of these serial entrepreneur run companies, wonderful business model, viral growth. And it's something that can just take a TAM, Total Adjustable Market, and just blow it up, you know, massively expand it because they make learning a language fun, interesting, useful, engaging, addictive. They got it. So anyway, that's my crazy idea of a small cap, and there are very few of them that go from small to large cap that could actually do it.

46:52It feels like everyone's focusing on the picks and shovels so much so that we're not focusing on the products themselves, i.e. the content. And I love that point that actually we should be thinking on what is the consumer, how is the consumer going to benefit from AI? I do want to sort of wrap up with just playing out a scenario for you here. Many of our listeners are quite young, hardworking professionals, most of them are looking to learn about the markets, invest, and they're probably investing pretty diligently. I would imagine that for many of them, this is the first market sell-off they've seen, major market sell-off they've seen, since they've been managing their own portfolios.

47:38Maybe your parents got burned in 2008, but it didn't affect you directly. This is kind of the first time you're seeing a big red number in your own portfolio. I'd love to get your advice, Mark, as someone who's seen the booms and the busts, what would be your advice to someone in that position right now? I'll try to simplify it with three points. You should expect these corrections. If you're an investor, you'll deal with these corrections. I don't know if it's on an annual basis, but every couple of years, like you're always going to lose, at some point you're going to lose money in stocks. And so, you know, just just be ready for corrections.

48:17Secondly, when you see a correction, there's this great article in the journal yesterday about how all financial managers are telling their clients, you know, don't panic, just stick with your portfolio. My reaction to that was, what do you mean? Like, if there's a correction, I should be buying stocks. You know, like, stick with my portfolio. Like, if I got cash, let's deploy it. You deploy it on these corrections. Do you do it immediately? No. Do you try to call the bottom? No. I mean, that's, you know, there's so many different things that could happen in the next, between now and the end of the year that they could take the market up or down.

48:47Do your homework. Find stocks and companies that you really believe that you know well and you like, kind of Peter Lynch principle, and then just wait for them to go on sale. What's a sale? Something that's 20 % to 30 % off. And I know sometimes that's off of a huge spike. Okay, so maybe that's not a sale. But if it's 20 % to 30 % off of kind of a decent run, that's a lot of subjectivity in there. Put a little bit money into that stock. Don't just sit on the sidelines. Like, are we supposed to buy low and sell high? So you're going to see corrections. When you see corrections, you should get excited.

49:20This is an opportunity. I've already identified companies that I like. I've got them on my buy list. and somebody made them cheaper for me. You should be willing to step in. And you may not call the bottom. It may go down to another 5 % or 10%. That's okay. But just that's the advice that I would give to people, that you're going to always have corrections. And the way you make money is you find high-quality companies and you wait till they get dislocated. And you're seeing that today. And I try to give a few ideas, and I'm sure some of them won't work. But I spent a lot of time trying to figure out what the high-quality names are.

49:52Figuring out when they've bottomed is almost impossible. And it's okay if I don't call the bottom on a stock. But I use these as opportunities to invest in names that you feel like you know well that are high quality. High quality companies that are dislocated. Mark Mahaney is a senior managing director and head of Evercore's internet research team. Mark has covered internet stocks for over 25 years and has been consistently recognized by an institutional investor for his research, including 17 years as a top three ranked analyst and five years as a number one ranked analyst. He joins us from, where are you, Mark?

50:25Where's your office? San Francisco. There you go. Joins us from the Bay Area. Mark, always good to catch up with you. Congrats on everything. Thank you, Scott. Nice to see you. Nice chatting with you, Ed. Thank you very much, Mark.

50:46Algebra of Wealth. Scott, I love the advice Mark just left us with, that for young people, a correction should be an opportunity, not a crisis. Would you agree with that? So Ed, I think one of the great myths that has been fomented across your generation by my generation is that market corrections or a market meltdown should be avoided at all costs, even if that means intervention or ramping up the debt with stimulus or keeping interest rates artificially low. People are, if you think about investments or their investing life cycle, they're generally speaking in one of two stages. They're in the investment stage.

51:24So you're in the investment stage. You're working hard, trying to establish currency professionally such that you can make good money and then hopefully you have the discipline to spend less than you make, save money, deploy it. When you're in the investing part of your life, you want the markets to crash because the key to establishing wealth is getting it at the right price. I'm in the harvesting stage. And that is, well, I'm still making good money. I'm living really well. I'm spending a lot of money. And I'm even at some point going to start seeing my net worth go down. I'm going to start harvesting my investments.

51:58I want markets to be irrationally high. So this gestalt or zeitgeist since 2008, where we will take out your credit card, keep interest rates artificially low and act as if it's a tragedy if the market's off two or three percent and start pounding on the table for Chairman Powell to intervene and cut rates. I think it's just such extraordinary bullshit and intergenerational theft and represents something much darker, and that is that a belief that the economy should be totally centered around keeping me rich, despite the fact that the real opportunity for younger people is to get a chance to buy real estate and stocks at some of the depressed valuations that I had the opportunity.

52:42Let me repeat, when you're your age, Ed, you want the markets to crash. Disruption is a good thing for your generation.

53:14Lifetimes

53:19You help me In kind reunion

53:31As the world turns And the dark flies

54:03We'll see you next time.

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