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Tech stock earnings 'seem to be getting worse': Analyst

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Jason Helfstein, Oppenheimer & Co. head of internet research, joins Yahoo Finance Live to discuss Meta, Snap, Amazon, and other major tech names.

Video Transcript

[MUSIC PLAYING]

- Welcome back. Oppenheimer out with a new call, and Amazon slashing its price target to $160 ahead of the company's earnings release. Here to discuss that and more in the tech sector is one of the authors of that new note, Jason Helfstein, Oppenheimer's Head of Internet Research. And thank you for joining us here.

Let me ask you, is this the beginning here? Because we've seen a number of downgrades today. You might have been listening. We were just talking about Snap. We can talk about that in a second. But this is a big one on Amazon this week. Please share your thoughts.

JASON HELFSTEIN: Sure. So we actually think that we're hoping the worst is out of the way for Amazon, meaning, that they've acknowledged that they over expanded during COVID, and assumed some of the tailwinds that they were seeing were more permanent. And so we're actually waiting to hear on how they're going to take some costs back out of the business and get the e-commerce margins back to ultimately, profitable levels.

So we do think we're past the worst of it. It is going to take time. I mean, this is warehouses. This is hiring people. This is logistics, vehicles, et cetera. But we do think we're probably past the worst of it from a margin standpoint for Amazon.

- So and Jason, where do you think it makes the most sense for Amazon to cut back on some of these costs?

JASON HELFSTEIN: I mean, right now they said they were going to do it, right? I mean, some of this is out of their control, obviously, the price of energy, which they kind of said was like 1/3 of the margin impact they're seeing that's out of their control. But basically, 2/3 of it they do have control over. And they are working to get down.

They haven't told us the pace of it. But you can imagine over a kind of a-- if they told us last quarter, this is the first quarter where they're actually starting to kind of work it down. And there's been a lot written in the press about it. But what's interesting to the stock about is that this valuation level, if you put kind of a 25 times multiple earnings multiple on the on the cloud business, AWS, and you put 10 times cash flow on the advertising business, you're basically paying $30 billion for the entire e-commerce prime fulfillment business, which we think is a steal. So that's why we think the stock is interesting, and kept an outperform rating and $160 target.

- Indeed, a steal. I want to push forward to Meta and Alphabet earnings later this week. And Jared mentioned Snap, of course, their awful earnings report last week, and now down 78% year to date. How big an indicator is that about the environment? And what do you expect from those two?

JASON HELFSTEIN: So we did downgrade Snap on Friday. I mean, I think all of us were expecting some headwinds from TikTok, but it was definitely worse than expected, and seems to be getting worse. And the reality is you really haven't seen a big pullback in consumer spending yet.

So if Snap is struggling in this environment, most, I think economists think that we haven't seen the full impact on the economy from the Fed. And they want consumer spending to slow from current levels. So if Snap is struggling now, it's only going to get worse. And we think ultimately, you know, the bigger platforms are consolidating more of that spend.

So if you're an advertiser who's trying to sell products direct to consumer, Facebook, or Meta, and Alphabet, they have better signals and tools, and you're probably allocating your money to them. So really, Snap is really seeing it on all areas. For Meta, we think actually they may have more positive things to say about improvements they've made around advertising measurement, but will express caution about future consumer spending and what happens with advertising.

With Alphabet, they've already talked about weakness in YouTube. That would be, for example, an area that advertisers would cut before they cut search. And so we do expect them to talk about continued healthy numbers in YouTube. It's slow in growth, but actually, stability in search. And search would be the last place that advertisers cut back in an event of a recession.

- And I've got to ask you about the circus over at Twitter. I don't think we got any huge news over the weekend. But of course, Twitter blaming in part the Elon Musk deal purchase price, purchase of them really not falling through. And I'm wondering what's going on in your head with the Delaware Chancery Court, and what implications this has for perhaps, any other firms, especially in the social media space.

JASON HELFSTEIN: Sure. I mean, I'm not going to speculate on what happens in the court case, because I'm not a legal expert I do think it is reasonable though that their advertising was hurt by the current situation. You've seen senior headcount, or senior leadership departures at Twitter. I think advertisers if they're going to invest in platforms right now, I would imagine Twitter is probably lower down in that priority list. And so you did see a significant slowdown in their second quarter revenue versus the first quarter.

However, some of it's probably not their fault, right? It's just as a result of the drama that they're engaged in. And so again, I wouldn't use Twitter as a kind of a broad proxy for the overall advertising ecosystem. And unfortunately for them, it probably doesn't get better until this court case is resolved. And they're trying to expedite it, and seem like the judge was in favor of expediting it, but you know, it's kind of who knows which way this goes at this point.

- And Jason, from social media platforms, I wanted to shift gears and talk about streaming platforms. And the NFL has come out with the NFL Plus, its paid subscription service that that's going to be launching at the end of the month. I wanted to get your thoughts on that, and what that means potentially in terms of competition for Amazon.

JASON HELFSTEIN: I mean, Amazon may be a bidder for it. Apple may be a bidder. So I think what we have seen is that the digital players want to be in the sports game I mean. I don't see any of them offering something as robust as ESPN, but I think that is perhaps, different this time around with some of these deals.

So again, so far, Netflix hasn't said they really want to be in the live sports business, mostly sports documentaries, and serialized shows about sports. But Apple and Amazon are ones to watch with this negotiation.

- Indeed. Well, we do appreciate your insights. Jason Helfstein, thank you so much for joining us this afternoon.