Tech stocks: Where to find 'safety,' according to one analyst

JMP Securities Managing Director & Equity Research Analyst Andrew Boone joins Yahoo Finance Live to discuss the tech sector and Twitter's earnings, and where investors should focus.

Video Transcript

DAVE BRIGGS: For more Twitter analysis, we turn to Andrew Boone, managing director and equity research analyst of JMP Securities, a citizens company. Good to see you, sir. So I talked about this off the top. Worst revenue miss ever for Twitter. And yet, shares are up. Your explanation?

ANDREW BOONE: I think you're dead on. And you guys gave me a nice intro here in terms of kind of the negativity around all of social, so I'm smiling. In terms of Twitter specifically, for the stock near-term, it's going to be all around Elon, right? The judge ruled recently that Twitter is going to see an expedited trial in October. That's what the market is betting on. Until then, I think it's very much a wait and see regarding attorneys and the trial and everything else. And that's going to drive shares [INAUDIBLE].

JARED BLIKRE: Andrew, I got to ask you--

RACHELLE AKUFFO: And obviously, a lot of people wanted some sort of forward guidance coming out of this. Obviously, they're not giving any at the moment. What is your take on what to expect, then, between now and the trial, then, in October?

ANDREW BOONE: Well, so let's break that down. The next set of earnings will be sometime in October, potentially early November, when you'd actually get information on 3Q. Up until that point, Twitter is not participating in conferences. You're probably not going to get much. You didn't get much this quarter. You didn't get much last quarter from management. I don't know why that would change, especially with the trial ongoing.

What I think everyone's looking for is whether there may be a settlement in terms of lawyers coming together and actually agreeing to some sort of an agreement of what happens here if Twitter is not acquired. Otherwise, it will be the attorneys battling it out in court.

JARED BLIKRE: Andrew, what's the eventual endgame here? Twitter is twiddling their thumbs. And I'm not trying to be cute here. There are a lot of problems at this company. I was going through some of the figures that you highlighted in your research note here. And it astounds me that they're spending this much money on general administrative, for instance, research and development, but they're not really saying what their execution plan is. What do you make of this?

ANDREW BOONE: G&A right now is going to be expensive, right? You have bankers that they're paying for. You have lawyers that they're paying for. That's kind of one-time items. They talked about $33 million for this quarter in terms of legal expenses that are related to just Elon Musk, whatever you want to call it. So that explains the G&A.

In terms of R&D, engineers are-- continue to be very expensive. Understood that macro is slowing, and the hiring environment may be changing on a go forward basis. But as of today, those are very valuable people that still command high salaries. And so Twitter is paying out for those.

What was interesting, if you actually parse through the numbers-- and you guys highlighted this earlier-- it's just the investment cost of goods sold. Twitter is actually making substantial investments in terms of infrastructure, which we were really surprised to see going back to last quarter's report and what's clearly continued in Q2.

And so to that end, Twitter continues to invest in growth. That makes sense to a certain level, just given the Dow numbers continue to be strong. But they're managing a business on a go forward basis for more growth, while also dealing with all of the headaches that Elon is providing.

DAVE BRIGGS: A lot of headaches, a lot of aspirin needed. So this is clearly a bad macro environment. We're talking about $80 billion in social media market cap shed today. We also talked about Meta down 7 and 1/2%, 50% year to date. But the one company we haven't discussed yet is the one that might be most relevant here, which is TikTok. Now, no transparency there. It's a Chinese private company owned by ByteDance. But how much of this is a TikTok story for the social media stocks?

ANDREW BOONE: You know, it's really-- that's a great question. The way that marketers think about budgets frequently is that-- you have line items, right? So you have a line item for [INAUDIBLE]. You have a line item for search. You have a line item for Facebook. There's an experimental line item that I think is now getting impacted by TikTok. And so, rule of thumb is that's 10% of ad budgets that end up going to this bucket.

And so where that used to go to Snap lenses, it used to go to newer products that were just less defined and had less discrete ROI, I think TikTok is doing a very good job of taking those budgets. And you're seeing that in Snap's numbers. I think that's less impactful for Twitter, right? Remember that 85% of Twitter advertising is brand spend, that 50% of Twitter revenue was video, right?

So those budgets typically come from more TV-based type conversion, where you have linear TV that is now transitioning to digital. But I think Snapchat was very much impacted by budget shifting to tech.

RACHELLE AKUFFO: And obviously, we have a lot of big tech companies reporting next week. What are your expectations given the macroeconomic environment that we're in?

ANDREW BOONE: Yeah, I mean, clearly, what we've seen today is that macro looks like it's not great. As we go forward, where I'm focused on more safety is, where there's more defined ROI for ad platforms. And so clearly, search is in that camp, right? I expect a steadier number from Google search, from Amazon advertising, right? Both of those are primarily search businesses.

And then where I expect more weakness and where I'm a little bit more nervous, if you will, is more top of funnel budgets, right? So what's a brand-based campaign, or what's somebody that may not get immediate payback on ad spend? And I think YouTube may be susceptible there. As I think about the open web more broadly, right, there are more brand budgets that may get pulled.

What the quandary is, for us on the outside, is that the hold cards, right, the big ad agencies have all been very strong. And so what we've seen earlier this week is numbers being met and guidance actually being raised for 2022 by the agencies.

So everyone's trying to figure out, hey, look, is this just digital advertising being kind of the first mover, the canary in the coal mine for ad budgets overall. Or is this really just ATT and IDFA that's impacting targeting measurement ROI in digital? And the overall system may actually be more healthy than what, certainly, the market thinks today.