Tech Roundup With Mark Mahaney: What 2023 Has in Store

Amanda Heckman: Hello and welcome back to our monthly tech roundup, the video series that takes a deep dive into the tech sector with two of the brightest minds in the business. I’m Amanda Heckman, Editorial Director here at Manward, and I’m joined by Andy Snyder, the founder of all things Manward. Hi, Andy.

Andy Snyder: Hello. Good to see you.

Amanda: Good to see you. And with us again is Wall Street tech veteran Mark Mahaney. Hi Mark, thanks for joining us, and Happy New Year.

Mark Mahaney: Good morning, Amanda. Good morning, Andy.

Amanda: It’s our first video of the year and we want to go big. What does 2023 have in store for tech? Will things get better this year, be about the same, or heaven forbid, be even worse than last year? And we can’t overlook the fact that this year will be heavily defined by what the Fed does with interest rates. Andy, we know that’s your favorite subject, but hang on, let’s start with Mark first. What are your thoughts on tech in 2023, Mark? What will be the biggest influences on the sectors’ performance?

Mark: Well, I think let’s start with the topic that you mentioned. It’s the interest rate environment, which is really the inflation environment, so I’m going to lump those two together. And then of course there’s macro. This will be a macro year. We had some signs of enterprise and consumer softening near the back half of ’22. It probably gets worse. The question is, just how much worse it gets, how soft the economy will get. That’s the second issue that’s going to be important for tech. And then I guess the third will probably be regulatory issues, regulatory challenges to tech. And that’s really big tech, and it’s really just a handful of names of some of the strongest companies out there, the Googles, Microsofts, Apples, Amazons of the world, maybe Meta. So those are I think are the three big things that we’re looking at.

And I think I’ll just start off with our point here that we turned tactically constructive on at least the internet sector, but I think that probably holds for technology too. Going into ’23, we were muted and cautious in ’22, which meant that we were wrong, we should have been bearish. But that’s the past, it’s always about the next call.

And what we have here are de-risk multiples, de-risk estimates, and a lot of cost actions that have created what I call an EPS slingshot opportunity. And just in a minute, the de-risk multiples, I mean multiples have come down materially. Could they come down further? Yes. But they have clearly come down materially over the last 12 months. If I look just at the internet stocks that I focus on a day-to-day basis, there’s at least half of them that are trading at five year trough multiples on EBITDA, on cash flow or on sales or on EBITDA. So that’s the de-risks multiples.

De-risked estimates. And you’ve had pretty broad cuts to estimates for each of the last four quarters. Could estimates get cut more? Yes, especially in a recessionary environment. But there have been a lot of broad estimates cut, so that does make the sector safer for people looking for long opportunities.

And then the third thing of these cost actions, and there it’s almost 70% of the companies that I look at have announced some sort of RIF, 5% plus RIF, reduction in forces, which is a nice way of staying employee layoffs, which is never a joking matter. But in a time when demand is tightening and income is coming in, like all households, you have to tighten the belts. There’s requirement for belt tightening. And we’ve seen some pretty big RIFs, that was Facebook or meta with a 13% RIF. More recently, DoorDash has done a 6% RIF. There’s a few companies that haven’t cut costs enough, I think Google is one of those. But you’ve seen a lot of companies take costs out as they need to.

And I just think you bring those three together, the de-risk multiples, the estimates and the cost actions, and it just makes it a more benign, tactically constructive outlook for tech stocks going into ’23.

Andy: One quick question on that, Mark. Is there a way that you look at reduction in force numbers and equate that to the effect on share price? Is there a simple way that viewers can look at a stock like Meta and see they laid off 10,000 people, whatever, is there a way that we can say that’s going to have this effect on the stock?

Mark: I think another way of asking your question, I think Andy, is what is the market rewarding more now, revenue growth or earnings? Revenue or earnings? And I just happen to think where the multiples are now, and given the macro concerns over the recession, I think the market’s more focused on, and it’s going to reward more, companies that defend earnings, defend free cash flow. I think good management teams have to be able to handle economic cycles. And when the economic cycle turns negative, as it always does at some point, then the job of a really good management team is kind of to defend earnings and free cash flow at some level. You don’t scrap all long-term investments, but there’s that balance. And so I think right now the market wants companies and will reward companies that show signs of cost discipline, cost efficiencies, and occasionally that does require reductions in force.

And also the key backdrop here, Andy, and I know we talked about this a little bit before, there’s no question that parts of tech overbuilt, overhired coming out of the COVID cycle. I thought the first company that came out and publicly acknowledged that was Amazon, off of its March quarter earnings call last year. They essentially said, “Look, we had all these demand curve extrapolations projections out of the COVID crisis when we clearly had a surge demand, but we had to plan capacity, we had to plan workforces for the next two or three years and we had to come up with what we thought the growth curves would be”. And they hired based on some of the more aggressive growth curves, they thought that could happen, and they didn’t happen. It’s not like there wasn’t a surge in demand, it just didn’t continue at that same pace for as long as these companies thought it would. And so companies like Amazon overbuilt and I think that overbuilt assertion charge is probably accurate for a good number of companies.

I mean, Salesforce has come out and said that they overbuilt, Facebook has said that. I mentioned DoorDash earlier, but they also said that. I think Google kind of strikes me as one of those odd companies. They had five quarters in a row of record high employee ads going into the September quarter, it just struck me as that doesn’t seem like the appropriate thing to do when you know that demand trends are going to soften. Anyway, that was a long-winded answer to your question, Andy, but I hope I answered it.

Andy: No, that’s very good. I like that. And so, Amanda, you asked me to talk about interest rates, and it’s almost speaking to the choir and everybody’s speculating about the Fed and interest rates and inflation right now. And we had the latest inflation numbers were right in line, the markets pricing in a 25 basis point hike in February. I think that’s probably in line.

I think Jay Powell is still trying to talk up a more hawkish game than the market is expecting. I think he’s trying to push that down. I don’t think he likes it when the market jumps higher on dovish inflation numbers. I think that’s what he’s trying to fight. And we’re starting to see the idea of almost rebound inflation as the expectations for inflation wane, that brings back money into the market, more speculation into the market. We’re seeing it with crypto, it’s up four or 5% a day here lately. That’s that money coming back in. So Jay Powell’s not going to like that.

So as I’ve said a few times, the more the market expects a flat lining of rates or even cutting of rates this year, I think, sadly, the more impetus that’s going to put on Jay Powell to hold course. And so I’m still more on the hold course little hawkish perspective. I think we will get a 25 basis point in hike, but I don’t think they’re going to pause nearly as quickly as the market expects.

So good or bad for tech, I think that’s fairly neutral for tech. I think a lot of that is priced into the sector, but I think the things that Mark’s hitting on here, capital efficiency, hiring efficiency, cutting back where they need to be is going to be strong and that’s going to be the driver. Then of course, once those interest rates do start to turn, as long as that’s not on a hugely recessionary trend is going to be very good. So overall, I think, Amanda, to answer your question, where I am on tech, you said worse than last year, I don’t think that’s likely at all. Neutral, I don’t ever like to be neutral, because I’m bullish on it. Not extremely bullish, but definitely bullish.

Amanda: All right, and we’ll leave it there for now, and I’m sure we’ll be revisiting all of these ideas throughout the year. So thank you everyone who’s watching, and thank you, Andy and Mark for a great conversation as usual, and we’ll see everyone next month. Take care.

Mark: Thanks, Amanda. Thanks, Andy. Good to see you.

Andy: Great, thank you.