As the second-quarter earnings season kicks off, Evercore ISI’s Mark Mahaney has revised his list of tactical calls for the large-cap internet sector. Despite the impressive 34% rally in the broader technology sector in 2024, Mahaney remains optimistic about the large-cap internet sector for the remainder of the year. He believes that while the opportunity for significant multiple expansion over the next 12 months may be limited, valuations have reached a sustainable level. Mahaney highlights the consistent or improving demand trends in most internet verticals, along with ongoing margin expansion due to enhanced cost consciousness, leading to a more mature embrace of sustainable profitability.
Mahaney has made several adjustments to his list of top large-cap longs. Alphabet and Uber Technologies have been elevated to the top of the list, with the addition of Shopify, and the removal of Amazon and Expedia Group. According to Mahaney, Alphabet is likely to outperform expectations in the second quarter, with generative artificial intelligence integrations into Google Search being undervalued by investors. Additionally, the growth of YouTube as a streaming platform is viewed as a positive catalyst for the stock. Mahaney also emphasizes Google Cloud scaling, reduced losses in Other Bets, and moderated headcount growth as sources of potential operating margin expansion for Alphabet.
Uber Technologies has moved up to the second-favorite large-cap long position in Mahaney’s list. He dismisses concerns about Uber being negatively impacted by the rollout of autonomous vehicles, suggesting that transportation networks like Uber may actually benefit from this shift. Mahaney sees Uber as the primary demand aggregator for Mobility and believes the stock is currently trading at a very attractive valuation based on enterprise value to free cash flow. He has set a price target for Uber at $80, representing a potential gain of over 10% from its current level.
The Rise of Shopify
The newest addition to Mahaney’s list is Shopify, with a price target of $75, indicating a nearly 17% upside from Monday’s close. Mahaney’s team recently upgraded the stock to outperform, citing its position as a best-in-class ecommerce platform business. With Shopify trading at a significant discount from its 52-week high, Mahaney believes it presents an attractive opportunity for investors. He identifies several factors that support a bullish thesis on Shopify, including its large total addressable market, strong competitive position, successful product innovation, and potential for increasing profitability in the future.
Amazon and Tactical Underperform
Interestingly, Mahaney has included Shopify competitor Amazon on his tactical underperform list, despite still liking the e-commerce giant as a long call. While Mahaney acknowledges that Amazon is likely to surpass expectations in the second quarter, he expresses doubts about the company’s ability to meet Wall Street’s $15.3 billion operating income forecast for the third quarter. He attributes this discrepancy to what he terms an “expectations trip-up” issue rather than a fundamental problem.
Overall, Mark Mahaney’s updated list of tactical calls reflects his strategic approach to navigating the ever-evolving landscape of the large-cap internet sector. His insights into companies like Alphabet, Uber Technologies, and Shopify provide investors with valuable guidance on where to focus their attention in the current market environment.