Tech Giants Bounce Back, But Consumer Concerns Linger
Despite a recent sell-off, tech giants like Amazon, Google, and Meta are showing signs of recovery, though their performance for the month remains below broader market averages.
Following a week of historic market rotation, investors are grappling with the future of these tech behemoths. Mark Mahaney, Head of Internet Research at Coresight Research, who holds buy ratings on all three companies, sheds light on the key questions swirling around these tech giants.
"The two biggest questions I continue to get are which stock is most dislocated, and which stock has the most interesting catalyst ahead of it," Mahaney stated. "While I remain bullish on all three, I see Amazon as the most dislocated," he added.
While Meta’s recent earnings delivered record results, the "phenominal" performance has left investors with less to anticipate. Amazon, however, saw significant debate regarding margin expansion, retail sales, and advertising revenue. Despite these concerns, Mahaney remains optimistic about the company’s long-term prospects. "I think the overall fundamentals for Amazon remain very much intact," he said. "AWS and cloud revenue will accelerate, advertising revenue will pick up in the second half of the year, and retail margins will continue to rise." He cited Amazon’s rapid growth and its "scale game" as key drivers for future success.
However, some investors remain cautious about Amazon’s performance, attributing the recent softness in consumer spending to the Olympics. Mahaney disagrees, claiming the "consumer has gotten a little soft," echoing trends seen in online travel. "The question is whether this is a temporary summer storm or whether we’re going into a hurricane," he said, suggesting that a "rebuilding of consumer confidence" is needed.
Google also faces headwinds, with the looming threat of antitrust regulation from the Department of Justice. Despite this regulatory uncertainty, Mahaney remains positive about Google’s product cycle, which he believes is "underappreciated" by the market.
Beyond consumer sentiment, the rising capital expenditure (CAPEX) cycle for these tech giants also presents a challenge. "The two biggest concerns probably have been how much cyclical exposure [these companies] have, and how extended the softness is going to be," Mahaney said. "The other one is, how much is their capex rising?," he added, pointing to the combined 160 billion dollars in capex projected for Amazon, Google, and Meta.
While some question the potential return on these huge investments, Mahaney maintains that the market “has completely missed” the potential for AI to significantly impact content companies like Meta and Google. He points to Meta’s successful deployment of AI in the last two years as a testament to its effectiveness. “I think that a year from now, we’re going to look back on this and say ‘wow, they really did get a great return on that AI CAPEX,’” he stated confidently.
With a focus on content companies, Mahaney predicts that the future gains from AI deployment will be seen in names like Meta, Google, and even smaller companies like Duolingo, which utilizes AI to enhance its language learning app. He believes that companies like Pinterest and Snap are also poised to benefit from AI improvements to both user and advertiser experiences.
While the tech landscape is still navigating through consumer anxieties, regulatory hurdles, and the rising tide of CAPEX, Mahaney remains confident in the underlying strength of these tech giants, particularly their embrace of AI. He believes that their investments will ultimately pay dividends, ushering in a new era of innovation and growth.
MAGA Stocks Bounce Back After Sell-Off, But Remain Underperforming
Despite a rebound in share prices following a significant sell-off earlier this week, "MAGA" stocks (Meta, Amazon, and Alphabet) are still lagging behind the broader market for the month. This underperformance comes after a notable rotation out of these tech giants, a shift that has been playing out for several weeks and attracted considerable attention from investors. To gain insight into this dynamic and the implications for these tech behemoths, we spoke with Mark Mahaney, Head of Internet Research at Evercore ISI, who holds a "Buy" rating on Meta, Amazon, and Alphabet.
Key Takeaways:
- MAGA stocks are bouncing back from a recent sell-off, but remain underperforming the broader market.
- Investor concerns about consumer spending, ad revenue, and capex have contributed to the underperformance.
- Mark Mahaney believes Amazon is the most "dislocated" of the three, with potential for significant upside given its strong fundamentals and growth in AWS and advertising.
- Mahaney expects Google’s improved search product and potential AI benefits to drive future growth, despite regulatory concerns.
- Meta’s recent performance has been strong, with the company demonstrating the power of AI deployment in its product offerings.
- Mahaney sees significant potential for AI to improve user and advertiser experiences across various sectors, highlighting companies like Duolingo and Pinterest as examples.
Investor Concerns and Catalysts for Growth
Mahaney highlighted two key questions investors are currently grappling with: which of the three stocks is most dislocated and which stock has the most compelling catalyst ahead?
Amazon is seen as the most dislocated, with recent concerns around margin expansion and softness in retail sales and advertising revenue. However, Mahaney remains optimistic about Amazon’s long-term prospects, citing robust AWS and cloud revenue growth and a belief that advertising will pick up in the second half of the year. He also remains confident that Amazon’s retail margins will continue to improve as the company’s scale expands.
Google’s performance is affected by regulatory uncertainties, primarily the Department of Justice antitrust investigation. However, Mahaney sees Google’s improved search product and the potential for AI-driven growth as significant catalysts. He believes that the market underestimates the positive impact of these technological advancements.
Meta stands out for its impressive recent results, driven by effective AI deployment in both its advertising and consumer product offerings. The company has successfully turned around its business over the past two years, demonstrating the power of leveraging AI. While not as dislocated as Amazon, Meta is seen as a less compelling investment opportunity given its strong recent performance.
The Capex Cycle and AI’s Role
Another key concern among investors is the rapid increase in capex spending by these tech giants. Mahaney acknowledged that this is a valid concern, but remains confident in the return on investment from these AI-driven investments.
He believes that AI will play a crucial role in enhancing product offerings and improving user experiences in the coming years. Meta’s success in this area serves as a prime example. Mahaney expects other companies like Duolingo and Pinterest to similarly benefit from AI deployment, which can revolutionize their offerings for both users and advertisers.
Beyond the Infrastructure
Mahaney emphasized the importance of focusing on the "content" side of AI, highlighting how AI can be used to significantly improve user experiences and product offerings. He highlighted Duolingo, a language learning app, as an example of a small-cap company successfully leveraging AI to enhance its user experience.
Mahaney also mentioned Pinterest and Snap as companies with potential to utilize AI to improve their offerings to both users and advertisers. He asserted that the market’s focus on AI infrastructure and chips is neglecting the potential of AI to dramatically improve consumer-facing services and products. This focus on the "content" side of AI is essential for understanding the full potential of this technology in shaping the future of tech companies.
Conclusion
While MAGA stocks remain underperforming the broader market in the short term, Mark Mahaney remains optimistic about their long-term potential. He sees Amazon’s fundamental strength, Google’s improved search product and AI-driven growth, and Meta’s successful AI deployment as catalysts for future growth.
The concerns around consumer spending, ad revenue, and capex are valid, but Mahaney believes that these companies are positioned to navigate these challenges effectively. The rising investment in AI is likely to yield significant returns, particularly in enhancing user experiences and product offerings.
Investors should stay attentive to the evolving investment landscape, particularly the role of AI in shaping the trajectory of tech giants. Focusing on the "content" side of AI, rather than solely on infrastructure, is critical for understanding the true potential of this groundbreaking technology.
