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Tech stocks sentiment ‘feels pretty awful, which is a great sign’: Analyst

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Jefferies Equity Research Analyst Brent Thill joins Yahoo Finance Live to discuss market volatility, tech stocks, and the outlook for investors.

Video Transcript

- Welcome back, everyone. The broader market volatility having a big impact on tech, with giants like Amazon, Apple and Meta all down significantly year-to-date. Joining us now to discuss is Jefferies equity research analyst Brent Thill.

Brent, great to speak with you today, and thanks for giving us some of your time. We know you're always on the move here. First and foremost, is it too early to call a tech bottom? And on the buying that we're seeing here today, you know, where would you continue to look through some of the headwinds that tech is facing at this point in time?

BRENT THILL: Yeah, thanks for having me. I think overall sentiment is awful in tech. I mean, it's one of the worst I've seen in 10 years. And so if you think about typically you want to buy when sentiment's terrible and sell when things are great, right, we're at one of those moments where everyone's saying, you know, how evil tech is and how bad it is, and everyone's running away from it. You know, we'd say selectively now, for investors that have a three to five-year window, it's a pretty good opportunity.

I don't know if we're at a bottom yet because we don't know the shape of the recession curve. And ultimately, this could get a lot worse, right? We could have a very difficult summer earnings period, where companies start to guide down, and then we take the numbers low enough for 2023.

We're below the street. We ultimately think street still has to come down. So I wouldn't call us at a bottom. Every rally we've seen in tech has been met with harder selling and a lower low. So right now, it feels pretty awful, which is a great sign. I think we're starting to see stories like Amazon, where you're getting the retail business for free. You know, Google's at 10 times EBITDA. Now Facebook, no one wants to talk about it.

The sentiment is just really, really terrible. And again, I think ultimately, right now, I haven't seen it this negative. Everyone's in energy. And so if the energy trade stops working, I think that's also another key for money to come back to tech, because every one of our clients went to a recession portfolio, owning energy, owning dollar store, owning, you know, Coke, Pepsi, McDonald's.

And at some point, that trade reverses. I don't know when that trade is over, but that's also going to be key to seeing this. But so far, I'd say we've seen massive consumer weakness. We've seen it in Target, Walmart, Amazon.

And is it going to spread to these enterprise companies? Microsoft negatively pre-announcing on FX. They didn't say that the underlying fundamentals were terrible, but we worry about that potential that is that a warm-up act for them to say, hey, FX has gotten more difficult, so is the fundamental business. So everyone's worried. And that's going to create a lot of worry going into the July quarter prints that-- for the June quarter end.

- You know, I want to pick up on that, Brent, the idea of consumer versus enterprise, because your coverage universe is so well sort of straddled and exposed to both sides, so you have some good insight through these companies into what's going on. And we've seen a lot of negative consumer sentiment. We have started to see enterprise pull back on spending, pull back on hiring, for example.

Do you think-- I mean, a lot-- most of the companies you cover-- not most, but a lot of them are really big companies. Are they going to be better positioned to weather this time, or are they still going to be exposed because their clients are going to be pulling back on spending?

BRENT THILL: Yeah, I mean, the consumer companies pulling back is impacting the enterprise companies. If you think about what just happened at Snowflake, for example, they highlighted a big consumer service last quarter where they saw them pull back in their spend. And we believe that was Coinbase. So the crypto market is tough. They're spending on enterprise technology to power the back end of their business.

And so I wouldn't say crypto is the end all, be all, but we certainly are seeing pockets. And what are we going to see in layoffs across a lot of companies? We've started to see a number of job cuts. Ultimately, what does that do to enterprise IT demand? So I think the enterprise companies are lagging the consumer. The consumer names have been weak. And that is concerning for the enterprise names, and we're keeping an eye on it.

- One thing that we do know for some of the big tech companies is where they're kind of leaning into some of their highest profit margin businesses. And that continues to come back to advertising, as well, for companies in Meta, for Google. And then even more so, you can throw Netflix into that equation, given the new ad-supported tiers that they're looking to launch. But if there's anything that we can read from past recessionary type periods or scenarios where companies are pulling back on ad spending, what would that be to really sense where these companies who are dependent upon the advertising revenue, where they can depend on a continued buy-in from marketers?

BRENT THILL: Well, right now, the advertising is the first thing that goes. Companies basically, if they have to cut costs, they cut advertising and marketing. And we're seeing that. It's not negatively pre-announcing five weeks left of the quarter. We've seen weakness in a lot of the checks. You know, what's going to happen with Amazon's ad business, Google, Facebook? I mean, I think everything, you know, right now is-- there's a harder headwind coming. In addition, you're living on the pandemic comps, right? The comps are really hard in Q2.

So it's going to be a pretty ugly Q2, in my opinion, in advertising, just because the comps, as well as we've already seen a pullback. And that's the first area that companies cut. You saw Adobe, who is in the advertising and marketing space, cut the third quarter guide and then back-end load the year, which concerned investors, and that drove the stock lower. I think right now, again, I think the biggest worry you would have is the advertising side, which gets cut, and then on the enterprise side, these big, massive elephant ERP upgrades, those things get cut. Big application upgrades, they get cut.

So there's definitely some-- a lot of worry that we still have. We've been pretty bearish because we think multiples got overwhacked, overzealous in terms of the multiples. And they've gotten hit pretty hard now, reflecting all those concerns. So I think a lot of this is now, you know, in a lot of these stocks, the worry. But I think we still have another difficult Q2 for ad-driven names to get through before we can see, I think, a bottom.

- Brent, good to catch up with you, Brent Thill, even if what you're saying is not very optimistic yet. Jefferies equity research analyst Brent Thill. Good to see you, as always.