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Top stocks to watch as earnings season kicks off

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Mark Mahaney, Evercore ISI senior managing director and head of Internet Research, joins Yahoo Finance to discuss tech sector outlook and leadership transition for Amazon and Stitch Fix.

Video Transcript

BRIAN SOZZI: Tech stocks are unlikely to be stay for the count for much longer. But choose your names wisely, folks. That's the good word from Evercore ISI Senior Managing Director and Head of Internet Research Mark Mahaney. The team just launched coverage on 36 Big Tech companies and outlined a host of worthy buys.

Mark Mahaney is here with us now. Mark, really awesome research here. Let's just set up some of your worthy buys. How will you-- how have you gone about identifying what tech stocks to buy right now?

MARK MAHANEY: So we looked at three factors. First is if you could show us your highest quality names that are benefiting from COVID in a way that there's, in some cases, been a permanent pull forward of demand, if we can find those stocks that are trading at reasonable valuations, that was one bucket.

The second is we were looking for dislocated high quality names, so irregardless of whether they benefited from COVID or not, but where they dislocated and high quality, even. Third, we looked for still, in one or two rare circumstances, COVID recovery names. I think that that kind of COVID recovery trade is well played out now or largely played out fully.

But I think there's still one or two opportunities there. So we took that screen, we applied it to the group. Top picks for us are, first, Facebook, second, Amazon. You know, your secular growth stalwarts, they've got very good macro exposure. Obviously, the companies are so large so as macro recovers from COVID, they'll benefit from that.

And then we think they're structural winners from the COVID crisis. So those are at the top of the list, and they're trading at reasonable valuations. They're actually trading at the same multiples they traded at pre-COVID. We actually think they're stronger assets coming out of COVID. So that makes them attractive.

Uber is our number three pick in kind of the mega cap space. And if I were to throw one other idea out there, I'd mentioned Spotify. To us, Spotify is a high quality name that's dislocated. It's traded off recently, little over 20%. And that's kind of our surprise, probably most contrarian call of the large cap names.

MYLES UDLAND: You know, Mark, I want to dig in a little bit on Amazon. This morning, we got Jeff Bezos his latest letter to shareholders, 200 million Prime members. He has some really compelling breakdowns there of the value that he sees Prime offering to consumers, AWS as well. But he, of course, is not going to be the CEO at the end of the third quarter.

How are you thinking about that transition at Amazon specifically and where that company is at in what's been a fascinating 25-year lifecycle here?

MARK MAHANEY: Well, I think Bezos probably comes down as the best entrepreneur of this generation, in a way like Steve Jobs was, in a way like Bill Gates was. And we'll see about the next generation. But-- so, yeah, it's a loss for the company. I think he has been sort of distancing himself from day-to-day operations for a couple of years.

I think he reengaged during the COVID crisis. But he's stepping up. Apparently, he's still going to remain actively involved, but just less so than he was in the past. The transition, who he's turned in-- who he's handed the keys over to, that S Committee, the group of about 15 to 20 senior executives, has been generally very consistent.

And Andy Jassy, who essentially founded AWS or was one of the people who came up with the idea, executed it, built it in, about half of the value of Amazon today, he'll be the new CEO. So I think that he's the most natural person. If I had known that Jeff Bezos was going to be stepping down or up, I would have said the best candidate to replace him would be Andy Jassy, and that's who's taking over as CEO.

So I wouldn't expect to see a dramatic change in the way Amazon operates or its strategic priorities for the next several years. So that kind of transition isn't necessarily a good thing. But if you're going to do a transition, the way they've set it up is about as best as it could be done.

BRIAN SOZZI: And Mark, Jeff Bezos writes in his annual this morning really at length at acknowledging they have to do a better job with employees. And certainly that comes after that labor vote a couple days ago. What does doing better look like for Amazon's bottom line on the employee front?

MARK MAHANEY: Well, they already took a step about 18 months ago or 12 to 18 months ago by increasing their hourly pay to $15 a month, which I think is something like 2x the level of the federal minimum wage. So that's the one-- one of the good things to do. And I think they spent something like 11 billion last year on COVID-specific expenses, more PPE, social distancing practices within distribution centers and fulfillment centers.

So yeah, you pay your employees more and you make them-- you do your best to make them safer during the COVID crisis. I'm not sure what else they need to do, frankly. They are the second largest employer now in North America. And my guess is that within three years, they'll be the single largest employer.

So you're going to-- just with that number of employees, you're going from 1 million to 2 million, they added 500,000 last year, you're going to deal with-- if there's any major employment issues on the horizon, Amazon is going to deal with them. This is no small startup and hasn't been for many years.

So I don't know if that really answers your question. I don't think that there's a dramatic change in a margin profile. I don't see any pending labor issues that dramatically change its margin profile. But maybe that would be a negative surprise. I don't believe it will happen, though.

MYLES UDLAND: And Mark, looking at the names that, again, you guys are initiating coverage here, you have a contrarian outperforming, a contrarian in-line bucket. One stock that stands out in the outperform, another executive shakeup, Stitch Fix, a name that you guys like. We saw Katrina Lake moving to the executive chairman role there.

How are you thinking about that company at its point here? Stocks obviously had a wild run for all kinds of mean-related reasons really. But how do you think about the fundamental set up for Stitch Fix?

MARK MAHANEY: So, you know, you're right that we just recently had the CEO step down after we made it one of our second SMID cap top buy. Wix is our number one buy, then Stitch Fix. And I don't like to see management turnover like that. Bezos was in place for 26 years or something like that. You know, he was going to move on at some point.

That was kind of quick, although, Katrina has built the company and ran it for 10 years, that's a long period of time. We've had a lot of management turnover in Stitch Fix. So at the margin, that does make us less constructive in a short period of time. I'm not sure I would have made it our number two pick if I had known we were going to have a CEO transition.

That said, I think this is a company that should benefit from us coming out of COVID. We need to-- at one point along the way, we're going to need to dress to impress again as we go out, you know, go out of our neighborhoods, go out of our homes. And so there will be a re-acceleration in the fashion and apparel spend. Stitch Fix should benefit from that.

And I think they've got some really nice product innovations that are going on now. They're going from kind of a subscription model, where you would get a fix of clothing, five pieces every quarter or every two months or whatever frequency you choose, to now having what they call direct buy functionality, which is just kind of like regular retail. You can go to Stitch Fix and buy one item.

Or they send you very personalized recommendations. And I think, as a bull on the stock, one of the reasons I'm a bull on the stock is I think they are doing a better job with data science than most other apparel retailers. And they can personalize that shopping experience for me better than others can.

So if that's true, if I'm right about that, you're going to see continued revenue growth acceleration, and you're going to see active customers continue to accelerate. And each active customer will become more and more engaged with Stitch Fix and spend more. So that's kind of the thesis on Stitch Fix.

I think valuation here is very reasonable. This is a dislocated stock. It's traded off 40% because they missed on the January quarter and now you've got the CEO stepping down. So it's about as controversial as you can find. I'm going to stick with it because I like the fundamental thesis, but I am nervous about it.

MYLES UDLAND: Mark, another name that you guys have is a contrarian in-line and a name that we have talked about quite a bit in last year is Peloton. How are you thinking about the setup for that company? Certainly a pull forward, at the very least, of a lot of where they thought they were headed.

But where do they go from here? I mean, who hasn't purchased the Peloton already that was thinking about setting up a home gym?

MARK MAHANEY: You're right. They certainly had a pull forward of demand. The question is whether the adoption for Pelotons was so low to begin with that you just kind of-- it's a debate about where you are in the S-curve when it comes to Pelotons. I'd argue that they were very early stage, and so we just had an acceleration. And then we'll keep moving along that S-curve of adoption for Pelotons.

But we did-- that stock has had a tremendous run for valuation reasons and really for valuation reasons alone, but were also a little bit uncertainty as to what Peloton looks like on the other end of the COVID cycle. We wanted to initiate with an in-line rating. So yeah, that's one we struggled with. Valuation is a bit on the aggressive side, but the growth here is also very impressive.

So maybe there's a little bit of valuation concerns, a little bit of concern over what's implied in your question, which is, what's the growth like post-COVID? And if we had great conviction of that, we would have an outperformer. We don't, so we're going to step on the sidelines and watch.

BRIAN SOZZI: And Mark, I like what you did in this initiation. You gave tech companies grades based on their ESG. Who's doing it right in ESG, and who gets your highest grade?

MARK MAHANEY: Oh, shoot, I think I've forgotten the answer to that. I know we had it laid out, and it's something we're starting to do work in. It's only in the last-- the only useful answer I have to you is I'd say it's about the last 18 months where we've started to gain increasing interest from investors in ESG screens. We don't run proprietary ESG screens.

So I've looked at other services. That may be something that we'll more formally incorporate in our analysis. So that was really just the first time that I've tried to look at third party screens and at least start to pay attention to it. And maybe I'm 18 months delayed in doing this. Maybe I should have been doing it before. So I'm sorry, that's the best answer I have to your question.

BRIAN SOZZI: Hey, we'll take it and congrats on the launch. Evercore ISI Senior Managing Director and Head of Internet Research Mark Mahaney, always good to speak with you.

MARK MAHANEY: Thank you.