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Tech analyst on setup into 2023: ‘Fasten your seatbelts’

Jefferies Analyst Brent Thill joins Yahoo Finance Live to discuss Big Tech, how layoffs throughout the sector will impact 2023, the struggles ahead for software companies, and the outlook for investors.

Video Transcript


BRAD SMITH: Big tech is taking a hit in 2022, with the NASDAQ down by about 29% year-to-date as the industry grapples with recession fears and extensive layoffs. But how will this impact the sector heading into the new year? We've got Jefferies' Analyst Brent Thill joining us now to discuss this. Brent, always a pleasure to get some of your time. First, when you think about and recap what 2022 has been to tech and perhaps what will also still protrude over into 2023, what most notably are you watching for?

BRENT THILL: 2022 is a year to forget for tech. It was a really, really difficult year. And as we head into '23, it's a tough setup in the first half of next year. We're facing a recession. Jefferies' global strategists and economists believe that there's no way we can hit a soft landing. So fasten your seat belts. It's going to be a hard landing. And it's going to take time for the industry to recover.

Right now, I think what's happening is many of these companies have overforecasted on the top line, and that's not coming in. And now they're having to cut expenses. They're having to cut employees. They're actually slowing their hiring. And this is going to last into the front half of '23.

So, as you know, stocks look ahead. And we think that probably the next signpost will probably be sometime mid next year in '23 as tech investors look at '24 numbers. We'll start to see, hopefully, numbers reaccelerate into '24. And again, stocks will move ahead of-- ahead of '24. And so our belief is it's going to be a rough ride in the front half of next year.

Many of our companies have not acknowledged some of the magnitude of the macro weakness, the magnitude of the headwinds that are coming in. And so we have been tactically bearish because of these concerns and the fact that many of these companies haven't really put the right steps in. We've said this tech has notoriously not gotten in front of the puck on economic changes, and they're really far behind on this change.

And so I think they're finally starting to wake up. This last earnings season, you're starting to see CEOs and CFOs acknowledge these headwinds, acknowledge that they need to change, acknowledge they need to lower the numbers. So multiples have been impacted. Numbers are still coming down.

We don't know exactly how far numbers are going to come. We're probably another 10% to 20% to go. And then that gives us the all clear sign as we can look at '24, as we can look at a potential reacceleration. And again, multiples have already been crushed, so we don't have to really necessarily worry about that. Sorry for being a grizzly bear, but short term, it's not a great setup.

JULIE HYMAN: So if they're cutting estimates by another 10% to 20%, what you're saying, though, is that that is already priced in and we won't see another, say, 10% to 20% downside in the stocks? Or we still could see-- I mean, we've already obviously seen a big rerating this year. Is that not done?

BRENT THILL: I think what we're learning in this market is that nothing's priced in, unfortunately. So I think there is a lot of bad news that's priced in. We're starting to see some number cuts that are probably not seen as bad a impact from investors in terms of the stocks pulling back. So I think some of it's getting priced.

But I do believe that in this tape nothing's really priced in. We saw some software names last week that everyone thought would lower, and they still went down 15% to 20% even while investors were braced for a cut. And so I still think that we have downside in the short term tactically because of that.

Now, for three-year tech investors, the picture starts to get more exciting. We've talked about this trade-- this inversion trade between XLE and energy, which has gone straight up this year in software, which has gone straight down. And so at some point, right, that unwinds. You know, remember three years ago, no one wanted to touch energy, and energy has been a massive outperformer with the XLE ripping this year.

And so I think we're ultimately-- we've got to have rates stop-- stop going higher. We've got to have numbers that have to get-- stop going lower. And that still, in our opinion, doesn't happen into the front half of next year.

Now, the bad news out of this whole thing is that Jefferies' economists are expecting the recession in Q3 of next year, starting later than anyone else is expecting. If that happens, the most bearish scenario is that '23 is a wash, and then we really see the recovery in 2024. And I just highlight that our economists have been spot-on the whole way.

And so I've listened to them. That saved us from what we've been hearing because none of the tech companies have been saying-- saying this is coming. They've all, again, said things are-- things are OK. I mean, all you have to do is listen to some of the recent testimony, and you're, like, these companies are not putting on their bigger picture lens to look at what's happening in the world.



BRIAN SOZZI: --I know you cover Salesforce. We have seen, over the past two weeks, a talent exodus, Tableau CEO, Stewart Butterfield, founder and CEO of Slack. You've had, of course, Bret Taylor. What is causing this exodus? And how concerned are you?

BRENT THILL: It's concerning, there's no question. Salesforce is a great company. It will survive any of these execs. Look, Stewart wasn't unexpected. When you sell your company for $28 billion, he's not worried about his next meal.

And he wasn't going to stay. There was no chance he was going to stay. And that's never happened in any software acquisition that I've covered in the last two decades. So we can check that one off as not as big of an issue.

Bret Taylor was a huge loss. Bret, ultimately-- I think this goes back to, in the last three years, there have been two co-CEOs. Both have left. And Keith Block left. And I think, ultimately, he wanted to be the full CEO. He didn't get the opportunity.

I think Bret has, again, entrepreneurial ambitions, maybe doesn't even want the job. But I think, ultimately, everyone is saying is, when is Marc Benioff going to give up full control and give the co-CEO role to a full captain, give the left seat of the plane to one of his up-and-comers? And I think this is challenging.

Again, I have huge admiration for Marc. But I think investors right now have lost confidence in his ability to get control of the expenses and actually drive this through this recession. And so, you know, again, that's investor sentiment, right or wrong. That's investor sentiment.

And this goes back to the Ballmer moment at Microsoft, which is Steve had a great impact at the beginning of the company and, ultimately, over time, he needed new leadership. And he made a lot of money stepping aside and letting Nadella come in and took the stock from $30 to $300. And so I think investors are ready for a full CEO, are ready-- were ready for Bret.

And I think part of the thesis is broken. Part of the other thesis was a lot of the top execs at Salesforce had huge admiration for Bret. And so what does that do to morale on the inside of that team? Clearly, Wall Street sentiment has been massively impacted because of this. So I think some of the timing is coincident.

Obviously, Tableau's CEO stepping down, I mean, they haven't had great numbers, so we don't know if that was force or his decision. But ultimately, it doesn't look good. And this has been, again, a roller coaster of transitions in this team. Still a great company, huge admiration for Marc. I think he had said on the earnings call that I get what I want.

So people forget he brought Brian Millham back to the company who's running sales now. He had left. I still wouldn't rule out can he bring Bret Taylor back? Is there a small sliver of hope here that maybe he could give him the full CEO role and maybe Bret would come back? He could come back for three or four years and still be mid-40s and still go on and do entrepreneurial things after running the company.

So there's a lot of different scenarios that could work out. I mean, it's a cheap name. The industry is under duress right now in terms of front office software buying. So they've got a handful of issues. And again, they're not expecting a recovery in their business until Q4 of 2023.

BRAD SMITH: Brent, I've got to hustle here. But when you think about 2023, going into 2023, given some of what you've laid out here, is there part of tech that you would be playing into 2023 and, on the other side, fading into 2023?

BRENT THILL: We have a sell on MicroStrategy, Bitcoin, and the core business. So MicroStrategy has been our sell. And we think, in general, tactically, you want to be underweight, tactically, the group. And then wait till the Q1 [INAUDIBLE] and Q2 '23 comes in, and then you'll get your opportunity. So just tactically kind of stay away is the advice.

And then for long-term investors, we still love the Intuit story. The tax and small business story's alive. They're really good at buying their own stock back. Microsoft is in a great position. Adobe is another story that we really believe in over the long haul.

And then for small-cap investors that has no economic headwinds, PowerSchool, PWSC, which lives in the education world. There's no economic impact because kids have to go to school and learn. That's a great story. And mid-cap, take a look at Procore, PCOR, in the construction industry, phenomenal management team and are dominating construction industry that is globally one of the biggest industries in the world.

JULIE HYMAN: I get PowerSchool updates on my phone all the time when they update my kids' grades. Brent, thanks so much. A lot of ideas there for investors. Brent Thill of Jefferies. Appreciate it.