With the second-quarter earnings season beginning to gain steam, Evercore ISI's Mark Mahaney has updated his list of tactical calls. Mahaney, head of internet research at the firm, remains "compound constructive" on the large-cap internet sector for the rest of the year. Although the broader technology sector's 34% rally in 2024 has "largely removed the opportunity for material multiple expansion for the next 12 months," the analyst thinks valuations are now at a sustainable level.
"Fundamentally, we see most Internet verticals experiencing consistent or improving demand trends in '24 as well as ongoing margin expansion driven by greater cost consciousness — i.e. a more mature embrace of sustainable profitability.
And capital allocation in terms of share repos and dividends has become more shareholder friendly," Mahaney wrote in a Sunday note. The analyst made several changes to his list of top large-cap longs: Alphabet and Uber Technologies have been bumped up to the top of the list, and Shopify is the latest addition to the list, with the removal of Amazon and Expedia Group. Alphabet is expected to post a "modest" beat in the second quarter and is one of the lowest-risk names this earnings cycle, per Mahaney.
He thinks the company's generative artificial intelligence integrations into Google Search have been "underappreciated by investors." YouTube's gaining strength as a streaming platform is another tail wind for the stock, he added. "We believe Street estimates have yet to reflect the greater commitment to Operating Margin expansion that GOOGL management has made.
Sources of Operating Margin expansion include Google Cloud scaling, reduced Other Bets losses, and more muted headcount growth in Core Google," said Mahaney. He has a $225 price target on shares, indicating upside potential of about 20%. Uber was promoted to Evercore ISI's second-favorite large cap longs from fourth place.
"We continue to believe that recent concerns about UBER being negatively impacted by an AV rollout are mis-placed," said Mahaney. "We actually view transportation networks or rideshare networks as likely beneficiaries of the AV rollout, as they offer the easiest and fastest path to wide scale adoption. UBER is THE demand aggregator for Mobility.
" Mahaney added that Uber shares are currently trading at a "very attractive" valuation of around 20 times enterprise value to free cash flow. He has an $80 price target on the stock, suggesting shares could gain more than 10% from Monday's close. The newest name on Mahaney's list is Shopify .
The analyst has a $75 price target on shares, suggesting upside of nearly 17% from Monday's close, and his team recently upgraded the stock to outperform. With shares trading approximately 30% below their 52-week high, Mahaney thinks now is an attractive time to enter what he calls "a best-in-class ecommerce platform business." "We believe there is a very resilient Long Thesis to SHOP shares, given its very large [total addressable market] (~$850B TAM), its very strong competitive position and its enterprise market opportunity (as confirmed by our recent channel checks), its clear track record of successful product innovation (measured in part by its consistently rising Attach Rate), and the potential for materially ramping profitability (we believe FCF margins can rise from 12% today to high-teens levels by 2026)," Mahaney said.
Meanwhile, he named Shopify competitor Amazon to his tactical underperform list. While Mahaney stated he continues to like the e-commerce giant as a long call, he isn't sure the company can match Wall Street's expectations for $15.3 billion operating income in the third quarter.
To be sure, he thinks Amazon is likely to post a slight beat in the second quarter. "Given AMZN's very consistent guidance pattern, the company is not likely to bracket with its guidance unless it has material Q2 OI upside. We refer to this as an 'expectations trip-up' issue and not a fundamental issue," Mahaney noted.
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