As second-quarter earnings season begins to heat up, Evercore ISI’s Mark Mahaney updates his list of tactical calls. Mahaney, the company’s head of Internet research, remains “complexly bullish” on the large Internet industry for the rest of the year. While the broader tech sector is up 34% in 2024, “largely eliminating the chance of significant multiple expansion over the next 12 months,” analysts believe valuations are now at sustainable levels. “Fundamentally, we see most Internet verticals experiencing consistent or improving demand trends in 24 years, as well as continued profit expansion driven by greater cost awareness, that is, a more mature embrace of sustainable profitability. capabilities. Capital allocation in terms of share repurchases and dividends has become more shareholder friendly,” Mahaney wrote in a report on Sunday. The analyst made several changes to his list of top large-cap bulls: Alphabet and Uber Technologies jumped to the top, Shopify was the latest addition, and Amazon and Expedia Group were removed. Mahaney said Alphabet expects “modest” growth in the second quarter and is one of the lowest-risk companies this earnings cycle. He believes the company’s generative artificial intelligence integration with Google search is “undervalued by investors.” YouTube’s growing strength as a streaming platform is another tailwind for the stock, he added. Mahaney said: “We believe that Wall Street estimates have not yet reflected GOOGL management’s greater commitment to operating margin expansion. Sources of operating margin expansion include Google Cloud expansion, lower losses from other bets and lower losses in Google’s core divisions.” Headcount growth is more muted. His $225 stock price target suggests upside potential of about 20%. Concerns that Uber will be negatively affected by the rollout of self-driving cars are misplaced. “We actually see transportation networks or ride-sharing networks as possible beneficiaries of the rollout of autonomous technology because they offer the easiest and fastest path to widespread adoption. Uber is a demand aggregator for mobility. Mahaney added that Uber stock is currently trading at a “very attractive” price of about 20 times enterprise value to free cash flow. His price target on the stock is $80, which indicates that the stock may be higher than Monday’s closing price. Prices are up more than 10%. The latest name on Mahaney’s list is Shopify. The analyst has a price target of $75, up nearly 17% from Monday’s closing price, and his team recently upgraded the stock to outperform. With shares down about 30% from their 52-week high, Mahaney believes now is an excellent time to get into what he calls “the best-in-class e-commerce platform business.” “We believe SHOP stock has a very resilient long-term thesis given its very large (total addressable market) (~$850B TAM), its very strong competitive position and enterprise market opportunity (as our recent channel check proven), its track record of successful product innovation (measured in part by its rising add-on rates), and the potential to significantly improve profitability (we believe free cash flow margins can rise from current 12% by 2026 to teenage levels),” Mahaney said. . At the same time, he added Shopify rival Amazon to his list of tactical underperformers. While Mahaney said he remains bullish on the e-commerce giant, he’s not sure the company can meet Wall Street expectations for third-quarter operating income of $15.3 billion. To be sure, he thinks Amazon’s second-quarter results could improve slightly. Mahaney noted: “Given Amazon’s very consistent guidance pattern, the company is unlikely to follow its guidance unless there is a material uptick in OI in the second quarter. We call this an ‘anticipation miss’ issue rather than a fundamental issue.”
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