Prof G Markets - Why Stocks Corrected + Second Quarter Tech Earnings — ft. Mark Mahaney

Episode Date: August 8, 2024

Scott and Ed open the show by discussing the global sell-off, Berkshire Hathaway’s portfolio management, and Intel’s terrible earnings. Then Mark Mahaney, senior managing director and head of internet research at Evercore, joins the show to discuss why the market’s freakout is an opportunity, not a crisis. He also shares how recent tech earnings are sending signals that we’re headed for a soft landing, not a recession. Finally, he identifies a couple small and mid-sized companies he thinks could be destined for mega-cap status. Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

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True story, Ed. I was riding a horse full speed. There was a giraffe next to me and a lion chasing me. So what did I do? I got my drunk ass off the carousel, Ed. I like that one. It's a little daddy. Me too. It's a little daddy. Me too.

It's a little daddy joke. How are you, Ed? It's nice. I'm doing very well. You're looking good. You look tan. You look fit. Really?

How's Aspen? Yeah, you do. That's so funny because when you came on, I thought that you looked really handsome. And my second thought was, you're getting it wrong. When you get a girlfriend, that's when you let everything go to shit. You start drinking. You get high it wrong. When you get a girlfriend, that's when you let everything go to shit. You start drinking. You get high every night. You just stop taking care of yourself.

You're doing a reverse order. Did you get a haircut? I did get a haircut, yeah. I got a haircut a couple days ago. Yeah, looks good. Well, this is a very nice, wholesome way to start. Nice, clean joke. Both telling each other we look handsome.

I think this is going to be a good episode. Yeah. One of us is lying. Oh, God, look at me. I literally, I look like Biden. He's told he has two weeks to live so he grows a goatee. I disagree. I think you look like you got some color.

Enough of that shit. Get to the headlines. Let's do it. Now is the time to buy. I hope you have plenty of the wherewithal. A disappointing July jobs report on Friday sent US stocks sliding. The sell-off went global in Japan, with the Nikkei falling more than 12%, its worst single-day drop since 1987.

And on Monday, the S&P and Dow marked their worst days since 2022, and the Nasdaq was down 3.5%. Berkshire Hathaway revealed it significantly reduced its stake in its two largest positions. Warren Buffett's company sold roughly half of its Apple shares in the second quarter and about 9% of its Bank of America shares. That news overshadowed Apple's third quarter earnings report that beat expectations and the stock dropped 5%. And finally, Intel is cutting about 15,000 jobs in an effort to save $10 billion next year as it tries to compete with rivals like Nvidia and AMD. The news comes after a disappointing

earnings report for the chipmaker with second quarter revenue declining and third quarter forecasts coming in below expectations. The stock fell almost 26% following that earnings report. Scott, your thoughts starting with the global market drawdown. The takeaway I have on both the Buffett story and the quote-unquote plunge in the Dow is keep in mind that every day, every day, media companies have to sell advertising. And the way they make money off of advertising is they sell the type of consumer, but more importantly, how many consumers or viewers are watching. So every day, regardless if there's any news at all, they have to pretend there is news and they have to pretend that it's dramatic. The quote-unquote plunge here, as of today, has taken the Dow back to where it was exactly a month ago.

I mean, this is such a fucking nothing burger. The jobs report, I guess, was weaker than expected. And there's this theory, an economist, I think her name is Claudia Sama, has this theory. Yeah, Sama. Sama. This prediction mechanism that when unemployment on a three-month rolling average goes up 50 bps, it's always predicted recession, and that's happened. But I saw it. This is, in my opinion, it's a big nothing burger. I thought the stocks are going to me just like portfolio hygiene. By the way, he's up 9x, 9x on that investment, and it's still his largest holding. So both of these stories felt to me like a slow news day where people are trying to pretend that these are more significant than they are. If you were going to read into anything, it's that Buffett, it's his cash position that is more telling. He's now got $270 billion in cash.

And so when you have a quarter of a trillion dollars in cash, you're sort of signaling that you think the market is fully valued and you want to build a cash pile, which is also a decent option right now because you can get about 5.5% on it and wait to strike if there's a correction. So I think that's the insight there. This notion somehow that the markets are plunging,

I don't get. What I also read here, and I can't stand this, is that there's already calls for a rate cut that's sooner. And I don't like kind of the Keynesian, almost socialist market intervention mentality that people in charge, baby boomers, are adopting. It's okay if the markets fall. It's okay if we have some disruption and the market's correct. I can't stand government intervention to try and artificially inflate the markets or artificially suppress interest rates. To me, it's just another example of how the incumbents would rather rack up credit card what, inflate the bubble more? Fine, as long as you keep me rich. And so I find all of this just sort of, I don't know, I feel very boomer around this stuff. I think it's all a big giant head fake. What are your thoughts?

I think I agree with everything you just said. Did I tell you you look handsome? Did I tell you to cancel? The question that I think people are asking correctly is, why are they down? They must be down for some reason. I think there are two main reasons that people have identified. One is that earnings have been coming in, most recently tech earnings, which is those are the earnings we care most about. Yes, they weren't amazing, but that's mostly because our expectations, as we have talked about in the past, have been set freakishly, freakishly high. Microsoft had 15% sales growth last quarter, and then the stock dropped. And that's because we have started to normalize

NVIDIA-like growth. And we have forgotten that actually Nvidia-like growth, where you're getting 100% to 200% growth, is not normal, and it never has been normal. So I think that's part of what's going on here. As you often say, we are anchoring off the highs as it relates to earnings. On the jobs data, we only added 114,000 jobs, which is a decline, and it's actually quite low. But again, it's not crazy low. And you think back to April, look at the April jobs report, we added, wait for it, 108,000 jobs, even lower than this most recent jobs report. And we didn't panic then. And the reason we didn't panic is because, you know, we recognize that this might not be a systemic structural issue. This might be an anomaly. This might be a sort of month-to-month issue.

And it turns out we were right because a month later, jobs doubled. Nothing about this current report is materially any different from that April report. I see this in many ways. I'd like to get your take as a buying opportunity. It seems to me that markets will bounce back. What I definitely don't see it as is time to sell. Yeah, that makes sense. One of my kind of yodas that I think is actually underappreciated is John Vogel, the founder of Vanguard. And he has this great quote, the stock market is a giant distraction from the business of investing.

So first off, you should recognize that you are not that different from other people, that you will experience the same emotions. And that when the market starts, when the market has a plunge, and of course, it's, you know, you get real time feedback on your phone, you're like, oh my God, I lost 10% of my net worth today or 4% of my net worth. And it's painful and you hate it. You think, wow, I really want... Humans will do almost anything to avoid pain. I know how I can avoid pain.

I can sell. Keep in mind that you are not an original thinker. And that emotion is running through the industry or running through a lot of different consumers. Your emotions in investing are your enemy. When you're doing really well, you start to believe that you're good at it, and you start to lever up and borrow shit on margin. And so is everybody else, which inflates a bubble. And when there's pain, people sell. Sometimes they're for sellers because of leverage.

Leverage is how smart people go broke. I mean, just to think about volatility here, in 94% of the years from 1928 to 2023, there have been drawdowns of 5% or more. So almost every year we're going to have 5% plus drawdowns. This wasn't even 5%. Yeah. And as we move on to this Buffett headline, which you have touched on, that one I found pretty interesting because Buffett is kind of the godfather of everything you just talked about. You know, his opinion is, don't go with your emotions, look at the fundamentals, look at the actual business. What I would be concerned about this headline is I could imagine that there are people out there, because of the timing, who are thinking Buffett's getting freaked out. He saw whatever economic data, he saw the jobs report, and now he's dumping all of his Apple. We should be clear, that's totally not correct. This was a

decision he made many, many months ago. It has nothing to do with all the other stuff that's happening in the market right now. So if you want to go sell your Apple because you're a huge Warren Buffett fan, go ahead. But let's be clear, Buffett didn't get spooked because everyone else was selling. Yeah, the takeaway here is simple around diversification. And that is Warren Buffett isn't looking to get rich. He's looking to not get poor. And when 40% of your net worth or your portfolio is in one stock, you trim it, regardless of the prospects, because diversification is the easiest way to get

risk-adjusted return. And for a guy with that kind of size of portfolio to have that concentration because it's run up 9x, he's just trimming it. This is a nothing burger. The insight here is everybody should be, when you get to 40, 50% of your, if you're fortunate enough to have that problem because one piece of your portfolio has skyrocketed, you're smart to diversify from that point. I try to never let anything get more than 10% now because I just don't want to go through what I've been through before. And that is a lack of diversification. You get hit hard and it just kind of knocks you off your feet. I just don't want to, even if I were to give up some upside, and I don't think I am, the downside is so much more painful than the upside. Anyways, I don't see it as a big deal.

The bigger deal, the company that is the luckiest company because the story got overshadowed and it would have been a much bigger story and in opinion, should have been the headline, is that Intel has really shit the bed. Their earnings expectations, they missed expectations by 80%, which is pretty dramatic. And over the past month, the stock has declined 42%, Ed. In January 2020, not that long ago, so just as COVID was about to hit us, Intel was worth more than AMD and NVIDIA combined. And today, AMD is worth twice as much, and NVIDIA, get this, is worth nearly 29 times as much as Intel. And it's weird because they were supposed to be the biggest beneficiary of the CHIPS Act. This is a company that has just not made the transition from providing computing power for PCs to the mobile phone or to AI. And then the thing that really pissed me off was their CEO put out this proverb about being steadfast.

And I'm like- Yeah, the Bible verse. Yeah, I'm like, Jesus, dude, I really don't need you to tell me what Jesus thought or whoever wrote the- Everything's got so bad, he started praying online. It's like, okay, can you maybe just tweet out what you're planning to do to restore a fraction of the shareholder value that's been destroyed here? This is the big story. And just to mark the age, when I graduated from business school in 2002, 1992, the best job you could get was everybody who was studying finance didn't go

to work for hedge funds because we didn't know what that was. They went to work for Intel. Intel was the company to get a job out of the high school of business in Berkeley. Really well managed, stock kept going up. Intel inside commercials were so funny. Andrew Grove was considered sort of the premier CEO in America. And this company has fallen so far far so fast. Any thoughts on Intel? Yeah, I mean, you know, it got drawn down around 30%. I think that is the right reaction. This report was really bad. I mean, it swung from profit to a loss, sales declined, scrapped the dividend, laid off employees. There's all of that. But there are two numbers that to me stood out as exceptionally awful. The first is the data center revenue. If you are an AI stock, which many people think of Intel as that, they are a chip manufacturer, they specialize in CPUs, but they've been trying to invest in AI and they've been looking to become a real player in the AI story. If you're

an AI stock, data center revenue is the most important revenue on your income statement. Why? Because that's the forward-looking indicator of your strength in AI. NVIDIA's data center unit grew more than 400% last quarter. AMD's grew more than 100%. If you're an AI company and your data center revenue isn't growing in the double to triple digits, then Wall Street's going to think something's wrong. Intel's data center revenue grew negative 3%. It actually fell, which is a huge red flag. The second massive red flag to me was the CapEx.

As we discussed last week, this is another key metric in the AI story. All of these tech companies are massively investing in AI spending and AI capital expenditures. Many of them are doubling their expenditures. And this race is becoming a question of, okay, who's down to invest the most amount of money in AI infrastructure? Intel announced they're cutting their CapEx spend. They're going to be drawing it down 20% lower than was forecasted. So the story that the market is taking away from these earnings, in my view, and that they're taking away correctly, is that Intel wanted to be a big player in AI. They started to kind of fall behind with

the rise of NVIDIA and AMD and some of these other chip makers. They started to lose money, and now this is their announcement, we're tapping out. Yeah, I mean, keep in mind, the stock is now at a 15-year low. Just four years ago, it was, you know was triple where it was now. So this has been, its PE is down to 21 on deflated earnings. To me, this might be, I think this is an act of this play. I'd be curious to know if it has one class of stock. And I don't know how long the CEO has been there. But this feels to me like actually, this is an interesting company to to look at to think if

there's an opportunity here and also i i see that idiotic tweet from the ceo and i think well this definitely spells activist to come in and say okay boss um you know do as you would do into other people and that is fire your ass. I like that. I like that. Love the poor, but don't love shitty CEOs. You're out. When God opens a door, it sucks you out of the company, bitch. We'll be right back after the break with our conversation with Mark Mahaney.

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their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Welcome back. Here's our conversation with Mark Mahaney, Senior Managing Director and Head of Internet Research at Evercore. Mark, thank you very much for joining us.

Glad to be here, Ed and Scott. So according to the VIX, the volatility index, which other people may know as the fear gate, according to that, this Monday was the scariest day, one of the scariest days in stock market history. The only days on record that were scarier were apparently the 2008 financial crisis and the COVID-19 outbreak. What happened this week? And why do you think Wall Street is so spooked? Yeah, I think you had a perfect storm of factors. So I'll just riff on this just for a minute. And a lot of people would have different interpretations. But, you know, first, you did have a big rally. So in order to have a

big downfall, you usually need to have a big upfall in advance. Well, that's what you had. You had the first half of the year, stocks performed extremely well. Secondly, you do have weak seasonality. August is typically the weakest month of the year for stocks. Third is you had hard landing fears. I mean, that was a 24-hour turn away. On Wednesday, it looked like we were coming in for a soft landing. And on Thursday, that all changed when you had weak ISM data and then you had the weak jobs report on Friday. So the market just completely changed its mind about the probability of a soft versus hard landing because of some real macro news that came out.

Fourth, you had some concerns about whether the AI cycle has been overblown. And there were comments made. Google's CEO made some comments about how he thought it'd be better to overinvest rather than to underinvest against this cycle. There was greater fear in being less prepared than over-prepared, I guess. But it made somebody wonder, well, don't you actually know what your returns are like with AI? And then all of a sudden, the big behemoths of the year that were such AI winners, NVIDIA, Microsoft, Google, there's just kind of a little bit of, are they just making this up?

I'm exaggerating, but you get the point. And then you had just small little or big over the weekend, you know, new geopolitical concerns about the Middle East. I think that all just wrapped up into this massive hangover or cocktail, whatever it was, those go together, that we experienced on Monday. We were discussing the jobs data, and it feels like the word recession is getting thrown around a little more recently, particularly because of this Psalm rule, this heuristic about how if you have this consecutive decline in jobs data, then maybe we're entering a recession.

So let's just start with that report. How concerned are you as an investor? And do you think that these recession fears are warranted? For right now, I don't feel like these recession fears are warranted. I don't have that. I don't have any great proprietary view. I'm not going to make something up into the jobs market. What I do have a view on is a couple of companies that I think give you very large macro data points. So if you cover Internet stocks and you cover names like Amazon and Shopify and eBay, you're privy to about a trillion in retail sales. That's a pretty large data point. If you cover Google and Meta, which I do, you're privy to about half a trillion and 500 billion in online advertising sales.

That's a lot. And if you cover travel companies like I do, like Booking and Airbnb and Expedia, you have a pretty good view into what's happening to consumer discretionary spend. And the fact is I line up all of the companies that I've kind of tracked this quarter. We're in the middle of earning season. It's not over yet, but most of the big prints have come. And I even throw in like a Netflix or Spotify. And most of these names are giving me readings that say soft landing. It doesn't scream recession. In fact, these companies that are taking up price like Spotify and Netflix aren't seeing

any pushback in terms of their subscriber growth. Meta had one of the stronger quarters that it's printed in a while. Amazon did talk about consumer softness, but they've been talking about consumer softness for a year. I didn't sense a major change. In fact, they said that the relative European softness versus the U.S. was a little less pronounced than they'd seen in the past. Booking.com mentioned that the European traveler got a little bit softer, but it wasn't orders of magnitude. So I shifted through all these data points and looking at it just from an analyst perspective, covering these companies that give you these large data points. I don't see the recession. It doesn't mean it's not going to happen, but these data points that

I see, their search for Google was as strong as expected fundamentally and versus expectations. To me, the recession risks have been overblown. Everything we've mentioned so far from an earnings perspective has been pretty good, it sounds like. Just sales growth, good bottom line, but the market has not really been reacting that way. And one thing that you mentioned

that the market may be taking issue with right now is just a little bit of disappointment or sluggishness when it comes to AI and the AI cycle. Is that the problem? Is that why we're seeing these drawdowns despite what looks like based on what we're seeing in your description, pretty solid earnings. Well, I think there are two issues. I do think there is this risk about that we're going through a hard landing. And even these companies that I mentioned that haven't seen it yet, maybe it's still coming. Maybe it's next quarter where there's going to be confession period. And yes, we finally see the weakness. So it's a risk, it's an overhang. And yeah, you had weak jobs numbers, you get two or three months of those. I mean, we could go into recession.

So, and you get an external shock. I mean, the economy's probably at a point that you get another external shock like we've had with Ukraine or COVID. Yeah, we could go back into recession, you know, wouldn't be that hard to see that happening in a month or two periods of time. I don't think it will happen, but that's'll happen, but then you're betting on external shocks. But anyway, that's one thing. That's what's caused these stocks to trade off. And then the other one is AI. And then we know that there's massive amounts of money being spent by these companies, Microsoft, Amazon, Google, and Meta. I mean, combined, I've lost track now. It's 180 billion in CapEx. It's some monstrous number like that. Are you sure you're going to get a return on all that CapEx spend? ROAI, is there such a thing as ROAI? And there better be. The good news for NVIDIA is that its four biggest customers are Microsoft, Amazon, Google, and Meta. The bad news for NVIDIA is if those companies don't get a return on AI,

then who will? And then that customer concentration could really blow up in their faces. And it's kind of hard to sit here and convince you that people aren't getting a good return on AI, but I will make one strong argument, and I feel strongly about it, related to Meta. Look what Meta's done the last three years. Three years ago, Meta's stock was in the tanks, like truly like 90 bucks. And where are we now? Meta's at 500. Wow. What a recovery that was. But it was in there because their ad tech stack got blown up by Apple privacy changes. And it looks like their user growth and their usage growth or engagement growth had really just kind of hit a wall. And that's not where we are now.

We did almost 30% revenue growth the last two quarters. I mean, at this scale, that's really impressive. And there's now growing their users like 6%, 7% year-over-year engagement is rising. And you know what's driven that? It's been AI deployments. I think this company went back in, rebuilt their ad tech stack. It took them a year or two to do it, but they did. And all the advertisers, most of the advertisers I talk with and the ones you can too, will tell you that their return on ad spend on Meta is better now than it was last year or two years ago. And then users are spending more time on Meta, on Instagram,

on Reels, on core Facebook. The company turned from a social company to a media company in terms of the content that's in your newsfeed. And they used AI to do that. It required a lot more compute, a lot more storage. It was very expensive, but they've already gone through one AI cycle.

And I think sometimes people forget that. So I think there is an example of where you can get great ROAI. And meta to me is exhibit A. The market doesn't agree with me on that completely. So that's why the stocks have traded off. I love that term ROAI, and it's kind of what we've been focusing on for the past several weeks.

What do you think general sentiment on Wall Street is about ROAI? And I ask that because we have seen these pretty strong earnings, and then it feels like every headline it says, but spending was up and shares slid. Is it just a generally negative, is there just fear around ROAI that the return on AI isn't going to be high enough? Or is it a little bit more optimistic than I'm portraying? No, no, I think you've captured it, Ed. That's the fear in the stock. And it gets a little bit worse because you know what the spend is, you know what the investment level is. These companies are telling you what their capex is, and you've got to wonder how big is depreciation going to get. And at the same time, then there's a little bit of concern over,

well, maybe if we're going to head into a hard landing or a recession, then spend's going up, but then revenue is going to come down. That's nasty. So that's like the double whammy on stocks. And the higher the multiple, the greater the fall. One of the advantages you have with Meta, which hasn't really traded off that much, or Google, is, they start off trading at 18, 19, 20 times earnings. So it's not like this is, this is not like, you know, 15, 10 years

ago when these things were trading at 30 to 40 times earnings with a lot more room for downside. There's just a lot more valuation protection. I don't mean to sound so bullish, but, you know, I generally am. And I look for these kinds of dislocations. I think they're generally great opportunities to buy stocks. But that's the concern. What you said is the concern in the market, which is, I don't know whether there is, this is the market speaking, I don't know whether there really is ROI. I just know that the CapEx numbers are rising dramatically, and I hear we may be going to recession.

That means revenue is going to be falling. Whoops, I want out of that. So, Mark, we've known each other a while, and there's always a few companies we like to talk about. And one of them was, everybody talks about Meta, but kind of the little social company that could or couldn't, if you will, Snap. And as long as I've been following Snap, it seems to have this cycle between kind of 8 and 16. 8, 16, people get excited. You know, at one point it hit 80. But generally speaking, it trades in this range. I think that's quite innovative, or they're quite

innovative. I think they've got a nice, decent audience, or an audience that advertisers like, specifically young people, and just anecdotal evidence. I see my teenage sons use it as a primary message, their primary messaging app. Just curious to get your take on Snap. And then I want to move on to talk about the company you and I used to talk about a lot, Spotify, which seems to be finally having its day in the sun. So Snap. Snap, I think, doesn't give you much of a read into the broad market. So just let's make sure we put all this stuff in perspective. They do, I forget, $3 to $4 billion in ad revenue. So that's versus $150 billion for meta, $250 billion roughly for Google.

If you're looking for signs of recession, don't look at Snap. Look at the two bigger companies to see whether things are getting better or worse. There's also something else that comes with being Snap. Like with Pinterest, you're a small ad tech platform. There's no advertiser out there that's going to first advertise on Snap and then decide whether they're going to spend any money on Google or Meta. They're going to first spend money on Google and Meta and then maybe spend money on Snap. So it's always had that risk. Scott, you talked about innovation on Snap and look, it has it from a user perspective, but the innovation, there's two audiences here and the innovation on the advertiser side has always been kind of middling. And sometimes it's been pretty poor. And so that's the problem with what Snap has. It doesn't have

anywhere near the reach and frequency of the two massive platforms. And then, oh, by the way, you can fill in Amazon. That's a much bigger platform. And by the way, you can fill in TikTok. And now Microsoft as an ad platform is two times bigger, I think, than two or three times bigger than Snap. So that's the challenge that Snap faces. They can monetize better, but they just need to innovate better on the advertiser side. Their innovations on the user side have been great, but not on the advertiser side. And it's hard enough being a small ad platform in a world of giants. It doesn't help that you're a small ad platform that hasn't innovated well.

So look, it's an investment. I've been on the sidelines on Snap for a while. I had a buy on it way back in the day. But it's been a while since I've recommended that stock. And it's very hard to see how they can get out of this. And it could well be a nice trading vehicle. But I don't view it as an investment vehicle. So SubScale and a weak ad

stack, Spotify? That would fall into that exact same description as well. The good news for Spotify investors is that that's 10 to 15% of their revenue. And the rest of the business is going to kind of two major inflection points. It's very similar in my mind to what Netflix did over the years. They kept improving, the product got better and better year in and year out at Netflix because they ended up getting more and more quality and the service got better and better distribution and more personalization, et cetera. And then once you build a value proposition, then you can start raising prices because your product is better. So you deserve to get raised prices. And then it feeds this flywheel.

Spotify, the same thing has happened. It's just, I don't know, six, seven years later than Netflix. And they've kind of run away with the streaming market. I've done annual surveys on this for eight years. The streaming market's gone to Spotify. There are more Spotify users on Apple phones than there are Apple Music listeners. And that's a captive audience. So that says something about how good the Spotify product is. And now they're going to market and saying,

hey, please pay us for these great features that we kept adding over time, like podcasting, like audiobooks, pay us a little bit more for it. And most consumers are like, sure, a dollar or two more for the world's music and podcast and audiobooks library. What a deal. I don't know what that is, but on 30 cents a day, yeah, sure, that's worth it. And they probably have more pricing power. So that's what's happened with Spotify. And at the same time, they've reached enough scale

that gross margins, that was always the issue, you know, for the stock of Spotify have finally started to move higher. Investors saw that and you can now, it was safe to buy Spotify for the first time, you know, took four years after their IPO, stock did nothing. Gross margins started to work, price, they started to take pricing and then investors, all of a sudden the coast was clear and, you know, congrats to Spotify. They deserve it. And then the other company we tend to talk

about a lot and you were right, I was wrong. I've always wrong. I don't know. I'm a big fan of Dara Khosrowshahi. I wasn't a fan of the previous leadership. Your thoughts on Uber and also Lyft? Uber has to address two issues today. And that is, are they AV roadkill, autonomous vehicle roadkill? And is the consumer going to fall off a cliff? And they, I think, emphatically answered the second one, which is no, there's no slowdown at all in their delivery business or in their mobility business. Nobody's trading down across different cohorts. It's kind of hard to believe, but that shows up in the numbers. There's no deceleration in the growth rate. So give them

the benefit of the doubt because there's no deceleration in the growth rate. And then, so they addressed that. Now this AV roadkillkill that's going to be a real issue for a while i don't think that's going to happen i think uber is so big they are what would be called the demand aggregator so uh as long as there's multiple av companies uh autonomous vehicle companies then uber is going to be in pole position and there's going to be somebody a zeus and then somebody else who's going to be in pole position and there's going to be somebody, a Zoosk, and then somebody else who's going to put their autonomous vehicles on Uber. And most consumers are going to, then consumers will decide. But I think you, Scott, and you,

Ed, and me, we're going to open up our apps like everybody else. And we're going to decide we want to Uber Black, Uber X, Uber Comfort, Uber Green, or uber robo it's going to be determined by well which gets to me sooner and which cost the least unless i have special use cases where i want to you know uber black or something like that and so i i actually think most consumers that's how they'll choose they're not going to pay extra for robo they'll do it one time that's it uh and uh anyway i just to me it gets to the point that Uber is going to be the demand aggregator here. So that's why there'll be a winner in the AV wars, which I think there will be AV wars in the future. I think it'll all be good for consumers and it'll take a while for the market to realize this. But in the meantime, you can buy Uber.

I think it's a really cheap price. That's today's debate. Scott, when you and I were talking about Uber in the past, the real question was, hey, can they ever make money? I mean, they went public with the biggest losses in recorded history. But the basic point you had to believe, and then you had to weather through a couple of years, and then you had to weather through COVID, which cut their business off at the knees, is can through scale, can they reach profitability and then material profitability? And the answer to that was I thought was yes. And then it kind of got proven two years ago. And then they finally started generating positive free cash flow. And ever since then, it is just hockey sticked up the free cash flow. So I'll tell you what, Scott, I cover three mega cap names now, Amazon, Meta,

and Google. And my bet is the fourth mega cap name I'll be covering, more than 500 billion market cap, is going to be Uber. Stay with us. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact.

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I mean, can you buy enough NVIDIA? That's been the point of view of the last year. And I don't cover NVIDIA as a stock, but anyway, that's certainly been the market sentiment. And I've likened this, Scott, not to the creation of the internet and not to the creation of the automobile, but to kind of the rollout of broadband. If you remember 15, 18 years ago, and I just, just when I started in my career, I think it was 20 years ago. And so a few years into my career. And, and I remember that people at the time were saying, well, how do I, you know, this country, I mean, the world is going from narrow band to

broadband and it created a much better internet experience, much greater digital experience. And how do I invest against that trend? And people were, you know, buying chip companies at the time. They were buying networking infrastructure companies at the time, Cisco. They were buying cable companies and telcos. And, you know, my narrative, and I'm sticking to it, is at the time I thought, well, why don't you buy the apps that people are using broadband to gain access to? Because, you know, your AOL experience, yes, AOL and your your your Lycos experience and your eBay experience and your Amazon experience, they're all getting much better and they don without having to do all the investments. That turned out to be kind of right. And so I use that analogy today, and I'll give you a very different perspective, which is that the content companies, so Meta and Google are at the top of this list. I mean, they're major beneficiaries because they can use AI to improve both types of content that they generate.

First is user-generated consumer content, and the other is advertiser content. The fancy word for that the change we're going to see in our meta news feed is going to be similar to, I forget, it was seven years ago when we went from pictures to video on meta. And I just imagine that in the next three to four years, we're just going to be wowed by some of the new creative that we get to see on social media platforms. TikTok could do this too. But it won't just be, you know, like it'll be, I don't know, somehow jazzed up visual experiences that you couldn't have done without AI. So I do think that there are content companies that are great derivatives, and I don't think the market's quite figured that out yet. I may be wrong, but that's my point of view. And so in that content,

you know, I think Spotify, anything that's a content company that can deploy AI to make its content more entertaining, more engaging, more addictive. Spotify could do it. Netflix could do it and is doing it. I think Meta and Google can do it too. One of the things I like about you, Mark, is that you make pretty bold calls. What's on your radar screen? When you're an analyst, you have buy and sell recommendations. What are your strongest buys right now? Well, so I wrote this book and I focused on this expression, DHQs, dislocated high quality companies. And I think there are 10 maybe high quality, really high quality companies that I cover, I think kind of enduring good fundamental assets.

And you kind of wait for them to get dislocated. All stocks get dislocated. And then the sell off may be creating one of those i thought google earlier this year was a great dislocated uh stock in the wake of the image generation controversies i think uber right now is a great dhq stock because everybody thinks that the consumer is going to go south and uber's going to it's going to its business is going to get hit and their AV roadkill. So it's created a stock that went from 80 down to 60 and below 60. That to me, so I want to buy Uber here. Now I throw in another one, Shopify.

Shopify, I think it's a very high quality asset. It's always been expensive, but that's pulled back a lot recently. And I think mostly over investment concerns, investment cycle, margin concerns. So actually that's one of the stocks I really like here. So those are kind of in my hit list. Amazon was not one of my top picks, but it sold off aggressively recently, I think from $200 down to $160. So off the top of my head, whatever that is, that's 15% correction or something like that, 17% correction. I think that the recessionary fears are overblown. I may be wrong. And if there is a recession, Amazon's going to be impacted. But if I'm right that those fears

are overblown, this is when you buy Amazon at 160 rather than at 200. So that would be another one. And then if you want a crazy idea, Scott, I want to go down cap a little bit. I got a new surprise for you. Here's a small cap, less than 10 billion market cap, that I think can go into large cap land. And I think it's actually an AI derivative. It'll be a positive AI play, although it's perceived in the market as AI roadkill. And that's this language learning app, Duolingo, D-U-O-L. And it's one of these serial entrepreneur-run companies, wonderful business model, viral growth, and it's something that can just take a TAM, total adjustable market, and just blow it up, massively expand it, because they make learning a language fun, interesting, useful,

engaging, addictive. They got it. So anyway, that's my crazy idea of a small cap, and there are very few of them that go from small to large cap that could actually do it. It feels like everyone's focusing on the picks and shovels so much so that we're not focusing on the products themselves, i.e. the content. And I love that point that actually we should be thinking on what is the consumer, how is the consumer going to benefit from AI? I do want to sort of wrap up with just playing out a scenario for you here. Many of our listeners are quite young, hardworking professionals.

Most of them are looking to learn about the markets, invest, and they're probably investing pretty diligently. I would imagine that for many of them, this is the first market sell-off they've seen, major market sell-off they've seen since they've been managing their own portfolios. Maybe your parents got burned in 2008, but it didn't affect you directly. This is kind of the first time you're seeing a big red number in your own portfolio. I'd love to get your advice, Mark, as someone who's seen the booms and the busts. What would be your advice

to someone in that position right now? I'll try to simplify it with three points. You should expect these corrections. If you're an investor, you'll deal with these corrections. I don't know if it's on an annual basis, but every couple of years, like you're always going to lose,

at some point you're going to lose money in stocks. And so, you know, just be ready for corrections. Secondly, when you see a correction, there's this great article in the journal yesterday about how all financial managers are telling their clients, you know, don't panic, just stick with your portfolio. My reaction to that was, what do you mean? Like, if there's a correction, I should be buying stocks. You know, like, I stick with my portfolio. Like, if I got cash, let's deploy it. You deploy it on these corrections. Do you do it immediately? No. Do you try to call the bottom? No. I mean, that's, you know, there's so many different things that could happen in the next, between now and the end of the year that they could take the

market up or down. Do your homework, find stocks and companies that you really believe that you know well and you like, kind of Peter Lynch principle, and then just wait for them to go on sale. What's a sale? Something that's 20 to 30% off. And I know sometimes that's off of a huge spike. Okay, so maybe that's not a sale, but if it's 20 to 30% off of kind of a decent run, that's a lot of subjectivity in there. Put a little bit money into that stock. Don't just sit on the sidelines. Are we supposed to buy low and sell high? So you're going to see corrections. When you see corrections, you should get excited. This is an opportunity. I've already identified companies that I like. I've got them on my buy list. And somebody made

them cheaper for me. You should be willing to step in. And you may not call the bottom. It may go down to another 5% or 10%. That's okay. But that's the advice I would give to people, that you're going to always have corrections. And the way you make money is you find high-quality companies and you wait until they get dislocated. And you're seeing that today. And I try to give a few ideas. And I'm sure some of them won't work. But I spend a lot of time trying to figure out what the high-quality names are. Figuring out when they bottomed is almost impossible,

and it's okay if I don't call the bottom on a stock. But I use these as opportunities to invest in names that you feel like you know well that are high-quality. High-quality companies that are dislocated. Mark Mahaney is a senior managing director and head of Evercore's internet research team. Mark has covered internet stocks for over 25 years and has been consistently recognized by Institutional Investor for his research, including 17 years as a top three ranked analyst and five years as a number one ranked analyst. He joins us from, where are you, Mark? Where's your office?

San Francisco. There you go. Joins us from the Bay Area. Mark, always good to catch up with you. Congrats on everything. Thank you, Scott. Nice to see you. Nice chatting with you, Ed. Thank you go. Joins us from the Bay Area. Mark, always good to catch up with you. Congrats on everything. Thank you, Scott. Nice to see you. Nice chatting with you, Ed. Thank you very much, Mark. Algebra of Wealth. Scott, I love the advice Mark just left us with, that for young people, a correction should be an opportunity, not a crisis. Would you agree with that?

So, Ed, I think one of the great myths that has been fomented across your generation by my generation is that market corrections or a market meltdown should be avoided at all costs, even if that means intervention or ramping up the debt with stimulus or keeping interest rates artificially low. People are, if you think about investments or their investing life cycle, they're generally speaking in one of two stages. They're in the investment stage. So you're in the investment stage. You're trying to, you're working hard, trying to establish currency professionally such that you can make good money and then hopefully have the discipline to spend less than you make, save money, deploy it. When you're in the investing part of your life, you want the markets to crash because the key to establishing wealth is getting it at the right price. I'm in the harvesting stage and that is, well, I'm still making good money. I'm living really well, I'm spending a lot of money, and I'm even at some point going to start seeing my net worth go down. I'm going to start harvesting my investments.

I want markets to be irrationally high. We'll take out your credit card, keep interest rates artificially low, and act as if it's a tragedy if the market's off 2% or 3% and start pounding on the table for Chairman Powell to intervene and cut rates. I think it's just such extraordinary bullshit and intergenerational theft and represents something much darker. And that is that a belief that the economy should be totally centered around keeping me rich, despite the fact that the real opportunity for younger people is to get a chance to buy real estate and stocks at some of the depressed valuations that I had the opportunity. Let me repeat, when you're your age, Ed, you want the markets to crash. Disruption is a good thing for your generation. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead. And Drew Burrows is our technical director.

Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you like what you heard, give us a follow and join us for a fresh take on markets on Monday. Reunion As the world turns And the dove flies In love Support for this show is brought to you by Nissan Kicks. It's never too late to try new things. And it's never too late to reinvent yourself. The all-new reimagined Nissan Kicks is the city-sized crossover vehicle that's been completely revamped for urban adventure.

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