Tech stocks are 'nearly at a discount right now', analyst say

Jefferies Senior Technology Analyst Brent Thill joins Yahoo Finance Live to explain why investors can reap the rewards of betting on the tech sector and the likes of Amazon, and also weighs in on the ongoing Twitter-Elon Musk saga.

Video Transcript

DAVE BRIGGS: We'll get our first read on how Amazon has moved away from the Bezos model to the Andy Jassy way when the e-commerce giant reports earnings next week. Meanwhile, a note from Jefferies says investors are getting the retail business, quote, "nearly for free." Senior research analyst Brent Thill with us on all things Amazon. Brent, nice to see you. Explain that comment why investors are getting retail essentially for free.

BRENT THILL: Yeah, thanks for having me on. Amazon, some of the parts of the model, there are multiple businesses inside Amazon. Well, one of the most exciting businesses and their bulk of their profitability is that Amazon AWS, their cloud business. In our sum of the parts, the Amazon AWS component of the business, combined with their other digital properties, are probably worth $1.1 to $1.2 trillion. Amazon's market cap today is $1.2 trillion.

And that, by definition, means that there's been no value placed on the retail business. Right now, Amazon is not where the consumer is, right? We're all traveling. We're not spending money online. We're out spending money in restaurants and shopping live and traveling and airlines and hotels, right? So I think right now, investors for the long-term have an opportunity to buy the stock now. And over time, we think the retail business will come back into fashion. It's out of fashion now.

And ultimately, what you're getting is today, really, just the digital business. And so you have this free stuff. You have this ability to load up-- and again, this is for three to five year shareholders, not the next two to three weeks, as there's still overhang on their e-comm business. But I do think it's going to take until into '23 before that business really finds its footing again. I think the consumer spend is way away from where Amazon's core is. But I think it's going to come back over time. And they'll return to growth and better margins.

But in the meantime, you get the stub of owning the software business, which is, again, the overwhelming majority of their profitability and recurring business. Every major company we talk to is moving to Amazon AWS, including our own firm, Jefferies, is continuing to leverage their cloud.

So we're really excited about where they're headed. And look, tech is on at a discount right now. It's not the space that people want to be. They want to be in other sectors. But as you see today with tech, you're seeing a nice bounce. And I do think ultimately the opportunity is to talk this away for three years. And I think you're going to be pretty happy three years from now.

RACHELLE AKUFFO: And as we look at all the different fingers that Amazon has its pie in, obviously, it had a bumper Amazon Prime Day in terms of seeing its best ever in terms of sales and items shipped. But then you also have Jassy, who's a big fan of the healthcare space and wanting to see more pushes in that direction. What are you keeping an eye on in terms of where Amazon is headed from here?

BRENT THILL: So, to your point, Jassy is a software guy. He was effectively the leader of AWS, which is their highest margin business. I like that. I'm a software guy. I've been doing software for over two decades. Software executives think about predictability, growth, and big margins. Software is an industry that has an incredible margin profile.

So I'm not saying that he's going to stop experimenting with flying drones to packages to remote farms or trying to look at new areas, like your point on healthcare. I'm very bullish about their healthcare initiative over time. I just think that they're going to be a little more focused on areas where they can make money.

And secondarily, most software execs I know want to make money and want predictability and recurring revenue. So I think that's a good thing to have as the CEO, which is his bar is probably higher. And I'm not-- I don't know Bezos's bar versus his bar, but I guarantee you, most of the execs I know in that industry have a very high bar for projects to get through that are recurring, visible, and have good margins.

And I don't think that maybe Amazon did that in the past. I think, again, haven't spoken to Jassy about this, but my gut would tell me that he's going to be more focused on that. So that's another reason why and my belief he should be positive on the story, given his background.

SEANA SMITH: Brent, while we have you, I also want to get your thoughts on Twitter because the name clearly in the news for a lot of reasons pertaining to Elon Musk. We're going to get earnings results from the company on Friday. Shares today right around $39 a share. Talk about whether or not Elon Musk is going to be forced to buy Twitter, what Twitter would look like under Elon Musk. Weigh in on that and what you think will likely happen in this scenario.

BRENT THILL: I mean, short-term, this is really hard to gauge. I mean, I think Twitter's business is fundamentally a disaster right now. You see the reports of employees leaving, employees working eight-hour weeks. You know, it sounds like sentiment's awful on the inside. And you see executives fleeing like flies out of that place. So I think in the short-term, they got to settle the ship.

No advertiser I speak with is like, yeah, that's really where I want to spend right now. So I think the core fundamentals are not good. And it's going to be under duress. But I think ultimately, what does the court decide? And does he have to buy it? I think everyone is under the assumption that 54.20 may not be the price, and it may be somewhere between low 40s to 54 that he's got to actually act on it.

But I mean, this is a long, drawn out saga. And I think our view in the way we handicap it at our firm is, we think something gets done maybe at a lower level, probably higher than here. But then you got to weigh how does the stock going to trade on what is not a great fundamental story right now? And I think that's the issue. But I think we're all under the assumption that, hopefully, something gets done. And it just may not be at the original 54.20 price.

RACHELLE AKUFFO: Well, I know we'll all be following along closely. A big thank you to Brent Thill there, Jefferies analyst. Thank you so much.