Two Evercore Titans Weigh in on Big Tech, Big Oil, Digital Ads, Clean Energy, & Their Top 2024 Picks
Hello and welcome to our latest MoneyShow MoneyMasters podcast segment. I'm Mike Larson, editor in chief at MoneyShow, and today I have a very special episode planned. Two of Evercore ISI’s top experts are joining me to talk about the markets. Mark Mahaney is senior managing director and head of Internet Research. He’s here to talk tech.
And James West is senior managing director and partner, and he's going to share his thoughts on energy. Welcome to the podcast, gentlemen. Hi Mike. Thanks, Mike. Glad to be here. Mark, I feel like I have to start with you for two reasons. One is that you've spoken at a couple of our MoneyShow events over the last year, and you've really been spot on with your bullish outlook for some key tech sector leaders. So, congrats on that. And second,
early in this year, the Magnificent Seven names look to be leading the market again. So, I guess I'd start with asking you: Is this going to continue and why or why not in your opinion? Okay. Well, let me see all the little context in all this. I think last year for equity growth and tech investors, I think last year was a really great opportunity. I think it's like a once in a decade opportunity. I don't expect
a repeat of that this year. It was a once in a decade opportunity because of the year prior, which caused this, what I call huge, dislocated, high quality company opportunities to exist. You had dislocated estimates, dislocated multiples. That's not the case now. Look
back at last year. We saw dramatic outperformance because the multiples were able to come back to more normal levels. There are still one or two stocks I find particularly interesting in the large cap space where I think their multiples could go higher because of one or the other, or what I call compounders, they go up 25% in a year because the multiple holds and earnings go up 25%. That's kind of where I think of what happens to Google this year. So, I think the overall backdrop here, that's the that's the stock setup, which is it's neutral, whereas last year it wasbullish. This year it's neutral. Then it's again, the question about fundamentals.
And I look at the fundamentals for most of the advertising or a lot of the advertising verticals or sectors that I track and the trends are going to be neutral to favorable. I think in 2024. I think advertising, for example, which impacts Meta and Google, I think that growth accelerates this year because of the Olympics, because of the presidential elections, because you got easy comps in the year, because there's a lot of product improvements, some of which are really helping make digital advertising more effective, not less, effective for marketers. So ,I think advertising is going to accelerate this year. I think cloud computing is going to accelerate this year largely because we're through what's called the optimization cycle for most companies. And I think there are other areas like this. We just were looking at Netflix
last night that reported, the entertainment subscription services like Netflix and Spotify. They both effectively have implemented price increases on very popular subscription businesses. So, I think you'll have acceleration in growth for those names. I look at this like, I call myself “compound constructive” for 2024 and I continue to be positively biased on these stocks. And just to lay them out, my top picks here are Amazon for 2024, Expedia for 2024, Meta, and then my fourth one would be DoorDash. Okay, great. We'll get back those individual names in a little bit. James, let me segueover to you. I
mean, as an energy specialist, you certainly have a lot to keep an eye on in this market, whether it's geopolitics, rising U.S. output, long term demand shifts tied to the energy transition. Can you set the big picture stage right now, and what you're seeing for in energy for our viewers and listeners. Absolutely, Mike. And thanks for asking the question, because I think there are a lot of conflicting trends and a lot of myths out there in the market. And we do cover all of
energy. So we cover the traditional oil and gas side and we cover the clean energy side as well. Clean energy is very nascent. It's a growing part of the energy mix. It will be a much larger part multiple decades from now. However, oil and gas is still incredibly relevant as 81% of energy is derived from hydrocarbons. That's only down from 82% a decade ago. So, you can see the impacts that renewables are
making on energy are not that large on the whole and consumption of energy continues to grow. There's 7 billion people on this planet who live in energy poverty. There's 1 billion of us that live with with energy, I wouldn't call it abundance yet, but probably abundant soon. And those 7 billion would like to live more like we live, or at least in some version of how we live with with access to energy resources. And for example,
a father in West Africa is not going to wait for me to build a wind farm so that he can cook dinner for his kids on a convection oven. Right? So, they're going to consume wood. They're going to consume dung in some cases, or coal. And we are at the largest coal consumption right now we've ever seen in history. The general trend is energy markets will continue to grow. And a lot of this growth in energy demand actually comes from Mark’s coverage group because it's the tech industry, the platform companies in tech. that are causing this surge of demand for cloud computing, which consumes a lot of energy.
And of course A.I. is expected to be some three and a half percent or so of the global energy consumption by 2030. That's a big number. So you take the U.S., for example. Electricity demand has been stagnant for almost two decades. It's now growing at a very
rapid clip. And so as we add wind farms, as we add solar, we're still seeing growth in that. We're seeing that demand get picked up right away and we're having all kinds of interconnection issues. And so, what I think we'll be talking about when we get to Las Vegas here next month is really, is energy transitioning or is energy evolving? Is it an energy revolution or evolution? I think it's more of an evolution. I think the transition over time will happen, of course. But I think that we’ll be in hydrocarbons for a long period of time. And we have in the the energy markets right now, growth and capital spending, primarily in the international markets of the Middle East land, Middle East offshore, and in the big offshore markets of West Africa, Latin America, and Asia. Whereas North America is somewhat of a flat market, it’s going through a lot of
consolidation and going kind of sideways. But in the hands of much better capitalized companies, you know, the bigger large or major oil companies, the bigger, larger independent operators and really our favorite picks now are the ones where the growth is continuing. And that's going to be, of course, SLB or what was formerly known as Schlumberger, which is the bellwether in the group. They're the most international and the technology leader in the space. And they're trading at a multiple that's below the S&P. Also TechnipFMC, or FTI, which is the major subsea equipment manufacturer. They're bidding for projects. The deliveries will occur in 29, 30 and 31.
So ,the visibility, the cycle is just enormous for the oilfield service industry. And then we also like Noble Corp., which is an offshore driller with an excellent balance sheet. They are not going to be building rigs like we've done in prior cycles and overbuild the market. Nobody's going to do that this time. I think there will be capital discipline and I think a lot of that huge cash flow that comes in is going to come back to shareholders with dividends and share buybacks. Great summary there. I appreciate it. You know, James, let me ask you a question about
the application of technology to the energy industry. We're hearing so much about some of these things like carbon capture, you know, hydrogen, clean hydrogen as a fuel, new battery tech and so on. How does that change sort of this supply dynamic outlook? And, you know, how do you see some things unfolding there over the next few years? Yeah, that's a great question. There's a lot of change coming to the industry. Some of this technology is not necessarily new, but it’s becoming more and more part of the the energy mix and is becoming more important to the energy mix. Solar or wind, battery storage or energy storage, are competitive with fossil fuels. Energy storage, of course, is the Holy Grail,
if you will, to make fossil fuels today start to make renewables non-intermittent. So, the problem with wind and solar is it’s not always sunny. The winds aren’t always blowing. But now if I can store that energy when that's not happening and release that energy, I can have 24/7 renewable energy. And so those are, I would say, energy storage is by far the fastest growing area of the industry. Hydrogen is nascent now.
It's the most abundant element in the world. But it doesn't occur on its own. It’s always attached to something. So, we've got to crack the hydrogen and then clean it up and then take that hydrogen and probably liquefy it or compress it before we use it to put into hard-to-abate industries. So, industries like steel manufacturing, cement manufacturing, well, we need a combustion event.
We don't want to use natural gas because that releases CO2. And then to your point on carbon capture, we've done that in the oil field for 100 years. This is nothing new for the oil field, but it's something where we've used that carbon, we've put it back in reservoirs to produce more oil and gas. Now we want to capture it, store it in the reservoir, not produce more oil and gas with that, but take it out of the the atmosphere.
And we're talking about technologies like direct air capture. Well, I would say hydrogen and carbon capture, maybe not in the economic stream right now relative to other new emerging technologies, but we’re getting there and getting there fairly rapidly. We've got a big government push, of course, with the IRA build here in the U.S., the green industrial plan in Europe, that's adding government incentives that's similar to what we did for the solar industry 11, 12 years ago.
And that got solar from not-economic to the economics of this point in our favor. It's just to wrap that up, our services in clean energy space have to do with really the integrators of energy storage. So Stem, which is a software provider, Fluence Energy, which is an integrator that’s battery agnostic and backed by a major utility that's going to become the next big green utility in the US. And also a company Altus Power. They're thought of sometimes as a rooftop solar
company for C&I businesses but they're really, I would say, a green distributed energy utility. Great. Thank you, Mark. You talked about some of the micro drivers. I mean, everybody always talks about growth stocks and the Fed and interest rates, but we'll leave that for another conversation. Micro drivers, it sounds like you're talking
about cloud computing, advertising spend. Can you go into that a little more in depth? I know you already mentioned Amazon and I think Expedia would be particular beneficiaries. Well, I won’t completely leave the macro behind. I do think that in an environment where rates are going to be coming down, I don't know the pace of the rates coming down. I don't know the frequency at which rates are coming down. But rates are coming down and that's
good for long duration assets. It just is. So just like that was a massive headwind in 2022, It becomes a tailwind this year. So, you know, we've had multiples come back to par is what I call them, like back to average levels. And what if something crazy happens? Probably not multiples going down, you know, undershooting. It's probably multiples overshooting like things never worked out. Perfectly rational. The crowd tends to move and it does. It doesn't always come right back evenly to par. So enough of that. In terms of these micro-things that I'm really excited about,
our top picks, you know, when I think about it, there are three fundamental catalysts that I think if I'm right about cloud computing growth starting to accelerate as we move beyond the optimization cycle, that means AWS, Amazon's web services is their cloud business, that should accelerate. That's kind of a big unlock. That's the real reason Amazon shares did great last year, but they've really had middling performance over the last two or three years because of the deceleration. As you start re-accelerating, the stock gets re-rated and our multiple goes higher. The second thing is, I think you're going to have record high operating margins of the North American retail business, record high. Third, I think you're going to get record high free cash flow margins out of the company as a whole. When these three fundamental catalysts come together, which I think they will, the stock goes materially higher. For the both of those three,
the most important is that of US revenue growth, acceleration in spending. Over to Expedia, this is a play off of leisure travel. So, the three- or four-point pitch, your simple pitch here is leisure travel was pretty robust in ‘22, pretty robust again in ‘23. We think it can be pretty robust again in ‘24. Driving spending are lodging and the airline industry, that record is a phenomenal job. But all the data points suggest that leisure travel demand isn't dropping, it’s not deteriorating, it’s not declining. Then secondly, this is a good industry to be in, a high ROIC, or Return On Invested Capital, one because you've got high margins, de minimus CapEx that's higher.
Want to see that. And then, you've got this convergence of growth rates between the three major players, Airbnb, Booking, and Expedia. But Expedia has far and away the lowest multiple. So that's kind of why I upgraded it a month ago. My joke has been that I haven't had a “Buy” on Expedia this century because 1998 I started covering it, that was its IPO. Now that's not quite true. I picked it up then and I've had a “Buy” in the past, but it's been several years. But I really like the set up into 2024. This is kind of an outlier call,
Expedia, the ticker EXPE. And the third META and META had a phenomenal year last year. The stock was up 200%. Not that I personally feel like it. Well, it trades at 21, 22 times earnings. I think you're going to get close to 30% earnings growth this year. You know, you've really got cost discipline in the market. The market is now rewarding companies that can sustain growth and cost discipline. The Internet sector was really
kind of, we'll give you growth at all costs. And at some point the investor said “No Mas”. They said “No Mas.” No more of that, too. So better at the end of 22 and spanked the stock. And that's really what caused the management to change its tune. And I think it's permanent change. So, they're really going to do this. Then you're going to have margin expansion with pretty good top line growth mid-teens, and you still got a couple of new growth catalysts. They still don't monetize Facebook Marketplace. And I guarantee you a lot of people watching this
use Facebook Marketplace. It is an extremely popular asset. It's under monetized or almost un-monetized. The other one is click-to-message ads. I mean, after the advertisers, the click-to-message ads are new to Meta, despite the fact that Facebook has been around for 15 years. And these are small developing businesses in the markets and it's about 25% of Meta’s revenue. So, this is a dynamic new ad format. It's indigenous to these markets. It works really well. It's becoming material. So yeah, I'll stick with with META as our number three pick.
Great, thanks Mark. James, one thing I have to ask about and we touched a little bit on Mark's side on the macro impact of rates and long duration assets. I mean, I think politics, regulatory issues here in the US and geopolitics are on everybody's plate in the energy sector. Anything you'd like to say about those issues, how you kind of see things playing out, impacting your universe? Sure. Maybe I'll start with the U.S. and the election cycle that we're in. There's a misguided view, I think, that the Biden Administration has been bad for oil and gas. We're actually
at peak production for both oil and natural gas that we've ever seen in the U.S. And so, it's an industry that's not overly regulated compared to other activities. Yeah, they’re not getting as many permits to drill in the Gulf of Mexico as they’d like. There is talk of an LNG moratorium on the Gulf Coast,
which may or may not happen. I'm not convinced it's good for the country right to happen, but they've actually been pretty positive, I would say, for oil and gas just kind of staying out of the way, quite frankly. On the clean energy side, the IRA bill is transformational. So, it's a $1.2 trillion bill. $369 billion, that's what the OMB scored
it. You talked to the DOE, you talk to the White House, and they'll tell you that the 3.69 billion was a the first number of what was probably going to be several trillion dollars of capital coming into the country. And people are worried that if Biden is not re-elected, maybe there's some rollback of the IRA. I'm not worried really at all about that. First of all, clean energy is a a bi-partisan issue. It’s not partisan. George W Bush was
the first guy who put in tax credits for solar through rooftop solar. So, this is something that everybody wants. And with the IRA, a lot of this manufacturing is transitioning back to the U.S. is happening in red states about 75%. And so why go after your own base? Plus, they're going to have boots on the ground and shovels in the ground as well in building these facilities. If there is, there's been a change next year. And at that point, you're not going to stop what's happening in this re-industrialization of the United States. Now, flip over to the Middle East, where we've got Iran's proxies getting into it with Israel and we've got the U.S. and the U.K. trying to clean up the Red Sea.
Let's be honest, we've got kind of a “Hot War” situation where things could spiral. It takes one guy with one bad shot to cause a major incident and then oil prices are much higher. Now, we think the situation right now is, you know, somewhat contained. And nobody wants a war between the U.S. or NATO and Iran. And Iran certainly doesn't want that. But it could get worse before it gets better. So, by the time we get to Las Vegas next month, it may be worse. I can't deny that and it
will cause oil prices to remain elevated. Good for the oil and gas industry producers, but also good for clean energy, because if oil and gas prices are up and clean energy prices are lower, people will consume more clean energy and deployment of energy will accelerate. Last question in the time we have, briefly to each of you, I know you're going to be joining us in Vegas. Any sneak peek gems you'd like to share? What your major topics are going to be there?
Well, as I mentioned, things could change in a month. So, we could be dealing with something totally different. Right now, it’s going to be, the title is Energy Transition or Energy Evolution with a big question mark at the end. So, I think we'll lay out our view of, yes, massive deployment or renewables, big game changers with some of the government subsidies, big game changers on the technology side that are happening. But let's not forget that 81% of energy demand that comes from hydrocarbons are satisfied by hydrocarbon laws. Don't forget about the 7 billion people that
are living in energy poverty. And so I think we'll talk more about what we see over the next probably 50 years is the evolution before really a transition. And same question to you, Mark. We're going to see whether tech and growth stocks can continue to outperform between now and the next month. We're going to have most of the big tech names having reported and the expectation is they're going to be putting up good prints. If they don't, we’re going to have to reassess why that happened and whether this is a temporary or permanent issue and if they do put up good prints, the question we're going to have, like you have with Netflix today, is “Can you chase them”? Should you continue to buy them? They're going to pop on good numbers. So, the fundamental is between now and next month to work through.
Excellent. Mark, James, thank you both so much for your insights and thank you all for watching. If you do want to hear more from these Evercore ISI analysts and dozens of other top trading and investing experts, I strongly encourage you to check out the MoneyShow/ TradersEXPO Las Vegas. Details are in the description below. It's going to be at the Paris Las Vegas from February 21st to 23rd. Gentlemen, thanks again for your time.
Mahaney Thanks, Mike. 00:20:26:23 - 00:20:28:05 West Thanks.
2024-02-03 05:37
