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Amazon is ‘hunting three big whales in its retail business’: Analyst

Evercore ISI Senior Managing Director & Head of Internet Research Mark Mahaney joins Yahoo Finance Live to discuss value-oriented tech stocks: Uber, Facebook parent Meta, and Amazon.

Video Transcript

[MUSIC PLAYING]

- As investors increasingly consider the prospect of higher interest rates, one of the groups that has been suffering the most has been technology. Large cap technology, the NASDAQ 100, hit in particular on days where there seems to be that uptick in concern about higher rates. So what should investors do who hold these large cap tech stocks in particular? Mark Mahaney is with us. Evercore ISI senior managing director and head of internet research. Mark, it's always great to get some time with you, especially at a time like this, where people are contemplating what this is going to mean. How are you thinking about your coverage universe in a world of rising rates?

MARK MAHANEY: Well, Julie, I think you set it up right. And I think the most direct useful point is that in an aggressively rising rate environment, which is what we're going to have-- and I think-- you're going to stretch me now. I think this is more than a decade since we've had really rising rates. I mean, that's the new, new thing this year for tech investors. In an aggressively rising rate environment, high multiple stocks tend to underperform. Why? Because a lot of their value is typically in the out years. So you raise interest rates. That means you raise your discount rate, which means your future profits are worth less today.

So that's why of the stocks I look at, consumer tech, the stocks that have traded off the most, 10%-plus year to date, are those that trade at the highest multiples. 10 times sales or greater. So you want to be careful about those. You want them to be more selective. And you probably want to find more value in tech stocks. You can find it. But you want to focus more on that.

- Mark, what are some of the best positioned stocks in your universe to handle or outperform in a rising rate environment?

MARK MAHANEY: So our top three mega cap picks this year are Uber, Amazon, and Facebook. Facebook may be the easiest of those. It trades at 22 times earnings roughly. But for something I think can grow earnings 20% to 30%. So it trades in line with our discount to its earnings growth rate. They have a ton of cash on the balance sheet. If you were to strip that out, this thing pretty much trades close to a market multiple for revenue growth. That's three times greater than the market earnings growth. That's at least two times greater.

So I think that's a great sort of value growth play in large cap. There's also a lot of controversy around the name. But I think they've got what I call fixes. I think they can address some of the ESG discount that the stock currently holds. And I think they can also come up with a better attribution model than-- or one that can match what the attribution models that were allowed with some of Apple's policies last year that are no longer allowed this year. But I think there are technical fixes to that. Amazon really quickly.

I think you can buy this at the same multiple that it's been at for years. And yet the stock has underperformed because of the major investment cycle last year. I think you'll come out of the investment cycle this year. Revenue growth will accelerate. Margins will expand. You want to be long a name like that. It's also just a really good asset. And then finally, Uber. Uber is our big recovery play. It's the one that's got the most upside if, when we come out of the COVID crisis.

- Mark, just going back on Amazon, I am surprised to see how the stock has underperformed on a relative basis over the past year against many of its larger cap tech peers. Why is this happening? And do you see a point in this year when market sentiment on Amazon will start to change markedly?

MARK MAHANEY: Brian, you're asking a good question. The stock has kind of traded sideways, if you look at the chart, for about 18 months. It had some breakout moves last year. And I think what undermined those breakout moves, what brought the stock back down to trade more in line flattish, really, was the severity or the size of the investment cycle, which was underappreciated, including by people like me.

The company had such nice margins during the first year of the COVID crisis because they had such a surge in demand. So we didn't quite see what was happening to the cost structure underneath. When the sort of super excess demand related to COVID and online retail started to abate last year, you saw how much they were spending. Amazon has increased its distribution capacity, all of its fulfillment centers, et cetera. It's increased that by

I think as much in the last two years as Walmart has built out in its entire history. There is a massive investment cycle going on at Amazon. What happens when you see that? Margins come down. And that was the surprise. That's what dragged the stock back down from breaking out. I think as you go through this year, you start comping against that. This company also faced a lot of inflation and supply chain risks in the back half of last year. I think all of those will be absorbed into the business model or comped against. And that's what allows the back half of the year revenue growth to accelerate, margins to expand, and the stock to take off.

- It's interesting as you talk about that unlocking of that effect at Amazon. But are we going to see also another phase of growth at Amazon, not just from those unlocking, but, you know, is there a new business we're underappreciated, or even existing business that has another phase of growth that it can enter?

MARK MAHANEY: I think so, Julie. I'm not sure. I think so. I refer to the company as hunting three big whales in its retail business. One is that, you know, look, we're going more and more towards one day delivery, guaranteed one day delivery, and then what I call super same day delivery. There now 15 cities in North America where you can order up to three million items and get them within the next five hours at most. So that's something new. We're getting faster and faster delivery.

And I think that unlocks more consumer spend. So you'll get more people signing up for Prime and Prime customers spending more with them. That's one whale. Second whale is going after groceries. And third is going after business supplies. Industrial supplies, business services, business supplies. Not services. I mean supplies. And I think those are all three relatively-- they're all very sizable whales. And I think they can allow unlock more revenue growth for Amazon. I think that's underappreciated in the stock.

- Hey, Mark. Let's talk about one of the other whales, I guess, for lack of a better term, that people are watching closely right now. And that's the potential of the Metaverse, right. And to go back to one of your other picks, Facebook, of course, which isn't technically called Facebook at all anymore, has attached itself to that trend. Is that the best way to play it, though? Or should people be looking more broadly or elsewhere right now?

MARK MAHANEY: Julie, yes, you're right. Thanks for correcting me. I'm going to have to remember it's no longer called Facebook.

- Yeah. We're all going to have to remember.

MARK MAHANEY: I think this Metaverse concept is-- it's not just a concept. I mean, the Metaverse exists now. A lot of people spend a lot of time on Roblox. That's an example of the Metaverse. It's a virtual reality world where you can assume an avatar and experience things in 2D to 3D dimensions. But I'm sorry. You can experience things in virtual reality. That's what the Metaverse is.

And this metaverse is going to be dramatically better, more interesting, more intricate, more detailed 5 and 10 years, just like the mobile internet is dramatically better today than it was back in 2007 and 2008 and 2009. But there was a mobile internet back then. So you have to think about this as a gradual improvement. Sometimes we'll see these dramatic improvements. But there will be an ongoing improvement in the Metaverse and in virtual reality. And, anyway, Facebook is a play off that.

I think one of the product development catalysts that we like to highlight for this year is the rollout of the Oculus Quest 3. But all of this is going to be relatively small and probably not material to Facebook's P&L-- to Meta's P&L-- for the next two or three years. You have to buy the stock for the core business. And think about Meta, the Metaverse, as a kind of long-term option value.

- Mark, before we let you go, I know you also cover GoDaddy. Do you view that as a short-term tactical buy under the assumption that Starbird, which is agitating for change over a GoDaddy, something happens there favorably?

MARK MAHANEY: We're on the sidelines on GoDaddy. We've had a major management change there. About three years ago, they brought in the former CTO of Expedia to be their CEO. So they've really tried to tech up, if you will, their management team. I think that was the right thing to do. And we've yet to however see it kind of show up in the fundamentals. I want to see revenue growth acceleration.

For growth investors like me, a company that prints high single digit, very low double digit growth, call it 8% to 12%, in the secular growth industry like web presence, that isn't terribly impressive. Now, the question is whether they can fix that or not. And that's part of the Starbird pitch. There are a couple of other elements that they're working on too. So I'm kind of in a wait and see camp. In that space, I prefer names like Wix. And then if I want to extrapolate even more, I prefer Shopify. So GoDaddy is intriguing. It's a show-me story in my book. It's a fixer-upper story. But I haven't seen the evidence that the fixes have occurred or have worked yet.

- I like that. Fixer upper. Mark, great to see you. Maybe when Facebook changes the ticker and everything, maybe then it'll finally sink in for us that its changed the name. Mark Mahaney, Evercore ISI senior managing director and head of internet research. Thanks so much.

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