Two Evercore Titans Weigh in on Big Tech, Big Oil, Digital Ads, Clean Energy, & Their Top 2024 Picks

Two Evercore Titans Weigh in on Big Tech, Big Oil, Digital Ads, Clean Energy, & Their Top 2024 Picks

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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

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