Why Stocks Corrected + Second Quarter Tech Earnings — ft. Mark Mahaney

Scott and Ed open the show by discussing the global sell-off, Berkshire Hathaway’s portfolio management, and Intel’s terrible earnings. Then Mark Mahaney, senior managing director and head of internet research at Evercore, joins the show to discuss why the market’s freakout is an opportunity, not a crisis. He also shares how recent tech earnings are sending signals that we’re headed for a soft landing, not a recession. Finally, he identifies a couple small and mid-sized companies he thinks could be destined for mega-cap status. Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 0:59Scott Galloway?

  Today's number, .005 seconds. That's how much faster Noah Lyles was than his closest competitor when he won the Olympics 100 meter final. True story, Ed. I was riding a horse full speed. There was a giraffe next to me and a lion chasing me. So what did I do? I got my drunk ass off the carousel, Ed.

• 1:30Scott Galloway?

  I like that one. It's a little daddy.

• 1:31Ed Elson?

  Me too.

• 1:32Scott Galloway?

  It's a little daddy joke. How are you, Ed?

• 1:34Ed Elson?

  It's nice. I'm doing very well. You're looking good. You look, you look tan. You look fit.

• 1:39Scott Galloway?

  Really?

• 1:39Ed Elson?

  How's Aspen? Yeah, you do.

• 1:41Scott Galloway?

  That's so funny, because when you came on, I thought that you looked really handsome. And my second thought was, you're getting it wrong. When you get a girlfriend, that's when you let everything go to shit. You start drinking. You get high every night. You like, just stop taking, you know, stop taking care of yourself. You're doing it in reverse order. Did you get a haircut?

• 2:00Ed Elson?

  I did get a haircut, yeah. I got a haircut a couple of days ago.

• 2:04Scott Galloway?

  Yeah, looks good.

• 2:06Ed Elson?

  Well, this is a very nice wholesome way to start. Nice, clean joke, but telling each other we look handsome. I think this is gonna be a good episode.

• 2:13Scott Galloway?

  Yeah, one of us is lying. Oh, God, look at me. I literally, I look like Biden. Like, he's told he has two weeks to live, so he grows a goatee.

• 2:21Ed Elson?

  I disagree. I think, I think, I think you, you look like you got some color.

• 2:25Scott Galloway?

  Enough of that shit, Ed. Get to the headlines.

• 2:27Ed Elson?

  Let's do it.

• 2:30Scott Galloway?

  Now is the time to cry. I hope you have plenty of the well at all.

• 2:37Ed Elson?

  A disappointing July jobs report on Friday sent US stocks sliding. The sell-off went global in Japan with the Nikkei falling more than 12%, its worst single day drop since 1987. And on Monday, the S and P and Dow marked their worst days since 2022. The Nasdaq was down 3.5%. Berkshire Hathaway revealed it significantly reduced its stake in its two largest positions. Warren Buffett's company sold roughly half of its Apple shares in the second quarter and about 9% of its Bank of America shares. That news overshadowed Apple's third quarter earnings report that beat expectations and the stock dropped 5%. And finally, Intel is cutting about 15,000 jobs in an effort to save $10 billion next

• 3:18Ed Elson?

  year as it tries to compete with rivals like Nvidia and AMD. The news comes after a disappointing earnings report for the chipmaker with second quarter revenue declining and third quarter forecasts coming in below expectations. The stock fell almost 26% following that earnings report. Scott, your thoughts, starting with the global market drawdown?

• 3:39Scott Galloway?

  The takeaway I have on both the Buffett story and the quote-unquote plunge in the Dow is keep in mind that every day, every day, media companies have to sell advertising. And the way they sell, make money off of advertising is they sell the type of consumer, but more importantly, how many consumers or viewers are watching. So every day, regardless if there's any news at all, they have to pretend there is news and they have to pretend that it's dramatic. The quote-unquote plunge here, as of today, has taken the Dow back to where it was exactly a month ago. I mean, this is, this is such a fucking nothing burger. The jobs report, I guess, was weaker than expected and there's this theory, an economist, I think her name is Claudia Sommer, has this theory. Yeah, Psalm.

• 4:24Scott Galloway?

  Psalm. This prediction mechanism that when unemployment on a three-month rolling average goes up 50 bips, it's always predicted recession and that's happened. But I saw, this is, in my opinion, it's a big nothing burger. I thought the stocks are going to come back the next day. I think they have a bit. And then the Buffett thing, he's taken his stake in Apple from 40% of his portfolio down to 20, which sounds to me just like portfolio hygiene. By the way, he's up 9X, 9X on that investment, and it's still his largest holding. So both of these stories felt to me like a slow news day where people are trying to pretend that these are more significant than they are. If you were going to read into anything, it's that Buffett, it's his cash position

• 5:09Scott Galloway?

  that is more telling. He's now got 270 billion in cash. And so when you have a quarter of a trillion dollars in cash, you're sort of signaling that you think the market is fully valued and you want to build a cash pile, which is also a decent option right now. You can get about 5.5% on it and wait to strike if there's, if there's a correction. So I think that's the insight there. This notion somehow that the markets are plunging, I don't get. What I, what I also read here, and I can't stand this, is that there's already calls for to, for a rate cut that's sooner. And I don't like kind of the Keynesian, almost socialist market intervention mentality that people in charge, baby boomers, are adopting. It's okay if the markets fall. It's okay if, if we have some disruption and the market's

• 5:54Scott Galloway?

  correct. I can't stand government intervention to try and artificially inflate the markets or artificially suppress interest rates. To me, it's just another example of how the incumbents, you know, would rather, you know, what, rack up credit card debt, what, inflate the bubble more? Fine, as long as you keep me rich. And so I find all of this just sort of, I don't know, I feel very boomer around this stuff. I think it's all a big giant head fake. What are your thoughts?

• 6:24Ed Elson?

  I think I agree with everything you just said.

• 6:26Scott Galloway?

  Did I tell you you look handsome? Did I tell you you look handsome?

• 6:31Ed Elson?

  The question that I think people are asking correctly is why are they down? They must be down for some reason. I think there are two main reasons that people have identified. One is that earnings have been coming in, most recently tech earnings, which is those are the earnings we care most about. Yes, they weren't amazing, but that's mostly because our expectations, as we have talked about in the past, have been set freakishly, freakishly high. Microsoft had 15% sales growth last quarter and then the stock dropped. And that's because we have started to normalize Nvidia-like growth. And we have forgotten that actually Nvidia-like growth, where you're getting 100% to 200%

• 7:13Ed Elson?

  growth, is not normal and it never has been normal. So I think that's part of what's going on here. As you often say, we are anchoring off the highs as it relates to earnings. On the jobs data, we only added 114,000 jobs, which is a decline and it's actually quite low. But again, it's not crazy low. And you think back to April, look at the April jobs report, we added, wait for it, 108,000 jobs, even lower than this most recent jobs report. And we didn't panic then. And the reason we didn't panic is because, you know, we recognize that this might not be a systemic structural issue. This might be an anomaly. This might be a sort of month-to-month issue.

• 7:58Ed Elson?

  And it turns out we were right because a month later, jobs doubled. Nothing about this current report is materially any different from that April report. I see this in many ways. I'd like to get your take as a buying opportunity. It seems to me that markets will bounce back. What I definitely don't see it as is time to sell.

• 8:19Scott Galloway?

  Yeah, that makes sense. One of my kind of Yodas that I think is actually underappreciated is John Vogel, the founder of Vanguard. And he has this great quote, "The stock market is a giant distraction from the business of investing." So first off, you should recognize that you are not that different from other people, that you will experience the same emotions. And that when the market starts, when the market has a plunge, and of course, it's, you know, you get real time feedback on your phone, you're like, oh, my God, I lost 10% of my net worth today, or 4% of my net worth. And it's painful and you hate it. You think, wow, I really want, humans will do almost anything to avoid pain. Like, I know how I can avoid pain, I can sell.

• 9:03Scott Galloway?

  Keep in mind that you are not an original thinker. And that emotion is running through the industry or running through a lot of different consumers. Your emotions in investing are your enemy. When you're doing really well, you start to believe that you're good at it, and you start to lever up and borrow shit on margin. And so is everybody else, which inflates a bubble. And when there's pain, people sell. Sometimes they're forced sellers because of leverage. Leverage is how smart people go broke. I mean, just to think about volatility here, in 94% of the years, from 1928 to 2023, there have been drawdowns of 5% or more. So almost every year, we're going to have 5% plus drawdowns. This wasn't even 5%.

• 9:45Ed Elson?

  Yeah. And as we move on to this Buffett headline, which you have touched on, that one I found pretty interesting because Buffett is kind of the godfather of everything you just talked about. You know, his, his opinion is, don't go with your emotions, look at the fundamentals, look at the actual business. What I would be concerned about, about this headline, is I could imagine that there are people out there, because of the timing, who are thinking Buffett's getting freaked out. You know, he saw whatever economic data, he saw the jobs report, and now he's dumping all of his apple. We should be clear, that's totally not correct. This was a decision he made many, many months ago.

• 10:27Ed Elson?

  It has nothing to do with all the other stuff that's happening in the market right now. So if you want to go sell your apple because you're a huge Warren Buffett fan, go ahead. But let's be clear, Buffett didn't get spooked because everyone else was selling.

• 10:41Scott Galloway?

  Yeah, the takeaway here is, is simple around diversification. And that is Warren Buffett isn't looking to get rich, he's looking to not get poor. And when 40% of your net worth or your portfolio is in one stock, you trim it, regardless of the prospects, because Diversification is the easiest way to get risk-adjusted return. And for a guy with that kind of size of portfolio to have that concentration because it's run up 9X, he's just trimming it. That this is a nothing burger. The insight here is everybody should be, when you get to 40, 50% of your, if you're fortunate enough to have that problem because one piece of your portfolio has skyrocketed, you're smart to diversify from that point.

• 11:21Scott Galloway?

  I try to never let anything get more than 10% now because I just don't want to go through what I've been through before. And that is a lack of diversification. You get hit hard and it just kind of knocks you off your feet. I just don't want to, even if I were to give up some upside, and I don't think I am, the downside is so much more painful than the upside. Anyways, I don't, I don't see it as a big deal. The, the bigger deal, the, the company that is the luckiest company because the story got overshadowed and it would have been a much bigger story. And in my opinion, it should have been the headline is that Intel has really shit the bed. Their earnings expectations, they missed expectations by 80%, which is pretty dramatic. And over the past month, the stock has declined 42%.

• 12:03Scott Galloway?

  And in January 2020, not that long ago, so just as COVID was about to hit us, Intel was worth more than AMD and Nvidia combined. And today AMD is worth twice as much and Nvidia, get this, is worth nearly 29 times as much as Intel. And it's weird because they were supposed to be the biggest beneficiary of the CHIPS Act. This is a company that has just not made the transition from providing computing power for PCs to the mobile phone or to AI. And then the thing that really pissed me off was their CEO put out this proverb about being steadfast. And I'm like, Yeah, the Bible verse. Yeah, I'm like, Jesus, dude, I really don't, I really don't need you to tell me what Jesus thought or whoever wrote the Bible. Earnings got so bad, he started praying online.

• 12:48Scott Galloway?

  It's like, okay, can you, can you maybe just tweet out what you're planning to do to, to restore a fraction of the shareholder value that's been destroyed here? This is the big story. And just to mark the age, when I graduated from business school in 2002, 1992, the best job you could get was everybody who was studying finance didn't go to work for hedge funds because we didn't know what that was. They went to work for Intel. Intel was the company to get a job out of the hot school of business in Berkeley. Really well managed, stock kept going up. Intel inside commercials were so funny. Andrew Grove was considered sort of the premier CEO in America. And this company has fallen so far, so fast. Any thoughts on Intel?

• 13:33Ed Elson?

  Yeah, I mean, you know, it got drawn down around 30%. I think that is the right reaction. This report was really bad. I mean, it swung from profit to a loss. Sales declined, scrapped the dividend, laid off employees. There's all of that, but there are two numbers that to me stood out as exceptionally awful. The first is the data center revenue. If you are an AI stock, which many people think of Intel as that, they are a chip manufacturer. They specialize in CPUs, but they've been, they've been trying to invest in AI. And they've been looking to become a real player in the AI story. If you're an AI stock, data center revenue is the most important revenue on your income statement.

• 14:18Ed Elson?

  Why? Because that's the forward looking indicator of your strength in AI. Nvidia's data center unit grew more than 400% last quarter. AMD's grew more than 100%. If you're an AI company and your data center revenue isn't growing in the double to triple digits, then Wall Street's going to think something's wrong. Intel's data center revenue grew negative 3%. It actually fell, which is a huge red flag. The second massive red flag to me was the CapEx. As we discussed last week, this is another key metric in the AI story. All of these tech companies are massively investing in AI spending and AI capital expenditures.

• 15:02Ed Elson?

  Many of them are doubling their expenditures. And this race is becoming a question of, okay, who's down to invest the most amount of money in AI infrastructure? Intel announced they're cutting their CapEx spend.

• 15:16Ed Elson?

  They're going to be drawing it down 20% lower than was forecasted. So the story that the market is taking away from these earnings, in my view, and that they're taking away correctly, is that Intel wanted to be a big player in AI. They started to kind of fall behind with the rise of Nvidia and AMD and some of these other chipmakers. They started to lose money and now this is their announcement, we're tapping out.

• 15:43Scott Galloway?

  Yeah, I mean, keep in mind, the stock is now at a 15-year low. Just four years ago, it was, you know, triple where it was now. So this has been, you know, its P is down to 21 on deflated earnings. To me, this might be, I think this is an activist play. I'd be curious to know if it has one class of stock, but I don't know how long the CEO has been there. But this feels to me like actually, this is an interesting company to look at, to think if there's an opportunity here. And also, I see that idiotic tweet from the CEO and I think, well, this definitely spells

• 16:23Scott Galloway?

  activist to come in and say, okay, boss, you know, do as you would do unto other people and that is fire your ass.

• 16:32Scott Galloway?

  I like that. I like that. Love the poor, but don't love shitty CEOs. You're out.

• 16:38Scott Galloway?

  When God opens the door, it sucks you out of the company, bitch.

• 16:43Ed Elson?

  We'll be right back after the break with our conversation with Mark Mahaney. If you're enjoying the show so far and you haven't subscribed, be sure to give Profiting Markets a follow wherever you get your podcasts.

• 17:32Speaker 05

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• 18:01Speaker 06

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• 18:32Ed Elson?

  Welcome back. Here's our conversation with Mark Mahaney, Senior Managing Director and Head of Internet Research at Evercore. Mark, thank you very much for joining us.

• 18:41Mark Mahaney?

  Glad to be here, Ed and Scott.

• 18:45Ed Elson?

  So, according to the VIX, the Volatility Index, which other people may know as the fear gate. According to that, this Monday was the scariest day, one of the scariest days in stock market history. The only days on record that were scarier were apparently the 2008 financial crisis and the COVID-19 outbreak. What happened this week? And why do you think Wall Street is so spooked?

• 19:13Mark Mahaney?

  Yeah, I think you had a perfect storm of factors. So I'll just riff on this just for a minute. And a lot of people would have different interpretations. But, you know, first, you did have a big rally. So in order to have a big downfall, you usually need to have a big upfall in advance. Well, that's what you had. You had the first half of the year, stocks performed extremely well. Secondly, you do have weak seasonality. August is typically the weakest month of the year for stocks. Third is you had hard landing fears. I mean, this was a 24-hour turn away on Wednesday. It looked like we were coming in for a soft landing and on Thursday that all changed. When you had weak ISM data and then you had the weak jobs report on Friday. So the market

• 19:54Mark Mahaney?

  just went, just completely changed its mind about the probability of a soft versus hard landing for, for because of some, some real macro news that came out. Fourth, you had some concerns about whether the AI cycle has been overblown and there were comments made. Google's CEO made some comments about how he, he thought it'd be better to over invest rather than to under invest against this cycle. There was greater fear in being under, less prepared than over prepared, I guess. And, but it made somebody wonder, well, you know, don't you actually know what your returns are like with AI? And then all of a sudden, the, the behemoths of the year that were such AI winners, Nvidia, Microsoft, Google, there's this kind of a little bit of,

• 20:39Mark Mahaney?

  are they just making this up? I'm exaggerating, but you get the point. And then you had just small little, or big over the weekend, you know, new geopolitical concerns about the Middle East. I think that all just wrapped up into, into this massive hangover or cocktail, whatever it was, those go together that we experienced on Monday.

• 20:58Ed Elson?

  We were discussing the jobs data and it feels like the word recession is getting thrown around a little more recently, particularly because of this SAAM rule, this heuristic about how if you have this consecutive decline in, in jobs data, then maybe we're entering a recession. So let's just start with that report. How concerned are you as an investor? And do you think that these recession fears are warranted?

• 21:26Mark Mahaney?

  For right now, I don't feel like these recession fears are warranted. I don't have that, I don't have any great proprietary view. I'm not going to make something up into the jobs market. What I do have a view on is a couple of companies that I think give you very large macro data points. So if you cover internet stocks and you cover names like Amazon and Shopify and eBay, you're privy to about a trillion in retail sales. That's a pretty large data point. If you cover Google and Meta, which I do, you're privy to about half a trillion and 500 billion in online advertising sales. That's a lot. And if you cover travel companies like I do, like Booking and Airbnb and Expedia, you have a pretty good view into what's happening to consumer discretionary spend.

• 22:08Mark Mahaney?

  And the fact is, I line up all of the companies that I've kind of tracked this quarter, you know, that we're in the middle of earning season that's not over yet, but most of the big prints have come. And I even throw in like a Netflix or Spotify. And most of these names are giving me readings that say soft landing. It doesn't scream recession. In fact, these companies that are taking up price like Spotify and Netflix aren't seeing any pushback in terms of their subscriber growth. Meta had one of the stronger quarters that it's printed in a while. Amazon did talk about consumer softness, but they've been talking about consumer softness for a year. I didn't sense a major change. In fact, they said that the relative European softness versus the US was a little less pronounced than they'd seen in the past.

• 22:50Mark Mahaney?

  Booking.com mentioned that the European traveler got a little bit softer, but it wasn't orders of magnitude. So I shifted through all these data points and looking at it just from an analyst's perspective, covering these companies that give you these large data points. I don't see the recession, doesn't mean it's not going to happen. But you know, these data points that I see, you know, their search for Google was as strong as expected fundamentally and versus expectations. But to me, it's recession risks have been overblown.

• 23:21Ed Elson?

  Everything we've mentioned so far from an earnings perspective has been pretty good, it sounds like. Just sales growth, good bottom line. But the market has not really been reacting that way. And one thing that you mentioned that the market may be taking issue with right now is just a little bit of disappointment or sluggishness when it comes to AI and the AI cycle. Is that the problem? Is that why we're seeing these drawdowns despite what looks like, based on what we're seeing in your description, it's pretty solid earnings?

• 23:59Mark Mahaney?

  Well, I think there are two issues. I do think there's this.

• 24:04Mark Mahaney?

  There is this risk about that we're going through a hard landing and even these companies that I mentioned that haven't seen it yet, maybe it's still coming, maybe it's just the, maybe it's next quarter where there's going to be confession period and yes, we finally see the weakness. So that's a, you know, it's a risk, it's an overhang and yeah, if you had weak jobs numbers, you get two or three months of those. I mean, we could go into recession. So, and you get an external shock. I mean, the economy's probably at a point that you get another external shock like we've had with Ukraine or COVID. Yeah, we could go back into recession, you know, wouldn't be that hard to see that happening in a month or two periods of time. I don't think it'll happen, but that's, you know, then you're betting on external shocks. But anyway, that's one thing. That's what's caused these stocks to trade off. And then the other one is AI. And, and then, you know,

• 24:48Mark Mahaney?

  we know that there's massive amounts of money being spent by these companies, Microsoft, Amazon, Google and Meta. I mean, combined, I've lost track now. It's 180 billion in CapEx. It's some monstrous number like that. Are you sure you're going to get a return on all that CapEx spend? ROAI, is there such a thing as ROAI? And there better be. Like, you know, the good news for, the good news for Nvidia is that its four biggest customers are Microsoft, Amazon, Google and Meta. The bad news for Nvidia is if those companies don't get a return on AI, then who will? And then that, and then that customer concentration could really blow up in their faces. And it's, you know, it's kind of hard to sit here and convince you that you people are getting a good return on AI. But I will make

• 25:33Mark Mahaney?

  one strong argument, and I feel strongly about it with related to Meta. Look what Meta's done the last three years. Three years ago, Meta's stock was in the tanks, like truly like 90 bucks. And where are we now? Meta's at 500. Wow. What a recovery that was. But it was in there because their ad tech stack got blown up by Apple privacy changes. And it looks like their user growth and their usage growth, their engagement growth, it really just kind of hit a wall. And that's not where we are now. We now, we did almost thirty percent revenue growth the last two quarters. I mean, at this scale, that's really impressive. And there's now growing their users, like six, seven percent year-over-year engagement is rising. And you know what's driven that? It's been AI deployments. I think this company went back in, rebuilt their

• 26:17Mark Mahaney?

  ad tech stack. It took them a year or two to do it, but they did. And all the advertisers, most of the advertisers I talk with, and the ones you can too, will tell you that their return on ad spend on that is better now than it was last year or two years ago. And then users are spending more time on Meta, on Instagram, on Reels, on on core Facebook. The company turned from a social company to a media company in terms of the content that's in your newsfeed. And they used AI to do that. It required a lot more compute, a lot more storage. It was very expensive, but they've already gone through one AI cycle. And I think sometimes people forget that. So I think there is an example of where you can get great ROAI. And Meta, to me, is example, exhibit A. The market doesn't agree with me

• 27:02Mark Mahaney?

  on that completely. So, you know, that's why the stocks, the stocks have traded off.

• 27:07Ed Elson?

  I love that term ROAI, and it's kind of what we've been focusing on for the past several weeks. What do you think general sentiment on Wall Street is about ROAI? And I asked that because we have seen these, these pretty strong earnings, and then it feels like every headline, it says, but spending was up and shares slid. Is it just a generally negative? Is there just fear around ROAI that the return on AI isn't going to be high enough? Or is it a little bit more optimistic than I'm portraying?

• 27:43Mark Mahaney?

  No, no, I think you've, you've captured it, Ed. That's the fear in the stock. And it gets a little bit worse because you know what the spend is, you know, the investment level is, these companies are telling you what their capex is, and you got to wonder how big is depreciation going to get. And at the same time, then there's a little bit of concern over, well, maybe if we're going to head into a hard landing or a recession, then spend's going up, but then revenue's going to come down. That's nasty. So that's like, that's like the double whammy on stocks. And the higher the multiple, the greater the fall. One of the advantages you have with Meta, which hasn't really traded off that much, or Google, is that, you know, they start off trading at eighteen, nineteen, twenty times earnings. So it's not like this is, this is not like, you know,

• 28:25Mark Mahaney?

  15, 10 years ago, when these things were trading at 30 to 40 times earnings with a lot more room for downside, there's just a lot more valuation protection. I don't mean to sound so bullish, but you know, I generally am, and I look for these kind of dislocations. I think they're generally great opportunities to buy stocks. But that's the concern. What you said is the concern in the market, which is all I, I don't know whether there is, this is the market speaking. I don't know whether there really is ROI. I just know that CapEx numbers are rising dramatically and I hear we may be going into recession. That means revenue is going to be falling. Whoops, I want out of that.

• 28:58Scott Galloway?

  So Mark, we've always, we've known each other a while and there's always a few companies we like to talk about. And one of them was, everybody talks about Meta, but kind of the little social company that could or couldn't, if you will, Snap. And as long as I've been following Snap, it seems to have this cycle between kind of eight and 16, eight, 16, people get excited. You know, at one point it hit 80, but generally speaking, it trades in this range. I think that's quite innovative or they're quite innovative. I think they've got a nice, decent audience or an audience and advertisers like specifically young people and just anecdotal evidence. I see my teenage sons use it as a primary mess, their primary messaging app. Just curious to get your take on Snap. And then I want to move on to talk about the company you and I used to talk about a

• 29:43Scott Galloway?

  lot, Spotify, which seems to be finally having its day in the sun. So Snap.

• 29:47Mark Mahaney?

  Snap, I think, doesn't give you much of a read into the broad market. So just let's, let's make sure we put all this stuff in perspective. They do, I forget, three to four billion in ad revenue. So you know, that's versus 150 billion for Meta, 250 billion roughly for, for Google. Like, you know, if you're looking for signs of recession, don't look at Snap. Look at the, look at the two bigger companies to see whether things are getting better or worse. There's also something else that comes with being Snap. Like with Pinterest, you're a small ad tech platform. There's no advertiser out there that's going to first advertise on Snap and then decide whether they're going to spend any money on Google or Meta. They're going to first spend money on Google and Meta and then maybe spend money on Snap. So it's always had that risk. Scott, you talked about innovation on Snap and look, it has it from a user perspective.

• 30:32Mark Mahaney?

  But the innovation, there's two audiences here. And the innovation on the advertiser's side has always been kind of middling. And sometimes it's been pretty poor. And so that's the problem with Snap has. It doesn't have anywhere near the reach and frequency of the two massive platforms. And then, oh, by the way, you can throw in Amazon, that's a much bigger platform. And by the way, you can throw in TikTok. And now Microsoft is an ad platform, is two times bigger, I think, than, two to three times bigger than Snap. So that's the challenge that Snap faces. They can monetize better, but they just need to innovate better on the advertiser's side. The innovations on the user's side have been great, but not on the advertiser's side.

• 31:14Mark Mahaney?

  And it's hard enough being a small ad platform in a world of giants. It doesn't help that you're a small ad platform that hasn't innovated well. So, look, as an investment, I've been on the sidelines on Snap for a while. I had to buy on it way back in the day, but it's been a while since I've recommended that stock. And it's very hard to see how they can get out of this. And it could well be a nice trading vehicle, but I don't view it as an investment vehicle.

• 31:37Scott Galloway?

  So subscale and a weak ad stack, Spotify?

• 31:42Mark Mahaney?

  That would fall into that exact same description as well. The good news for Spotify investors is that that's 10 to 15% of their revenue. And the rest of the business is going through kind of two major inflection points. You know, it's very similar in my mind to what Netflix did over the years. They kept improving the product, it got better and better, year in and year out at Netflix, because they ended up getting more and more quality, and the service got better and better distribution and more personalization, et cetera. And then, once you build a value proposition, then you can start raising prices because your product is better. So you deserve to get raised prices, and that feeds this flywheel. Spotify, the same thing has happened. It's just, I don't know, six, seven years later than Netflix.

• 32:25Mark Mahaney?

  And you know, they they've kind of run away with the streaming market. I've done annual surveys on this for eight years. The streaming market's gone to Spotify. There are more Spotify users on Apple phones than there are Apple Music listeners. And that's a captive audience. So that says something about how good the Spotify product is. And now they're going to market and saying, hey, please pay us for these great features that we kept adding over time, like podcasting, like audiobooks, pay us a little bit more for it. And and most consumers are like, sure, a dollar or two more for the world's music and podcasts and audiobooks library. What a deal. I don't know what that is, but on a 30 cents a day. Yeah, sure, that's that's worth it. And they probably have more pricing power. So that's what's happened with Spotify. And at the same time, they've reached enough scale that

• 33:09Mark Mahaney?

  gross margins, that was always the issue, you know, for the stock of Spotify, have finally started to move higher. Investors saw that and you can now, it was safe to buy Spotify for the first time. You know, it took four years after their IPO, the stock did nothing. Gross margins started to work. Price, they started to take pricing and then investors, all of a sudden, the coast was clear and and you know, congrats to Spotify. They deserve it.

• 33:33Scott Galloway?

  And then the other company we tend to talk about a lot, and you were right, I was wrong.

• 33:39Scott Galloway?

  I don't know. I'm a big fan of Darkos Rashai. I wasn't a fan of the previous leadership. Your thoughts on Uber and also Lyft?

• 33:46Mark Mahaney?

  Uber has to address two issues today. And that is, are they are they AV roadkill, autonomous vehicle roadkill? And is the consumer gonna fall off a cliff? And they, I think, emphatically answered the second one, which is no, there's no slowdown at all in their delivery business or in their mobility business. Nobody's trading down across different cohorts. Kind of hard to believe, but that shows up in the numbers. There's no deceleration in the growth rate. So give them the benefit of the doubt because there's no deceleration in the growth rate. And then so they addressed that. Now, this AV roadkill, that's going to be a real issue for a while. I don't think that's going to happen. I think Uber is so big, they are what would be called the demand aggregator.

• 34:29Mark Mahaney?

  So as long as there's multiple AV. Companies, autonomous vehicle companies, then Uber's gonna be in pole position and there's gonna be somebody, a Zeus, and then somebody else who's gonna put their autonomous vehicles on Uber. And most consumers are gonna, then consumers will decide, but I think you Scott, and you Ed, and me, we're gonna open up our apps like everybody else, and we're gonna, you know, decide we wanna Uber Black, Uber X, Uber Comfort, Uber Green, or Uber Robo. It's gonna be determined by, well, which gets to me sooner and which costs the least, unless I have special use cases where I want a, you know, Uber Black or something like that. And so I, I actually think most consumers, that's how they'll choose. They're not gonna

• 35:13Mark Mahaney?

  pay extra for Robo. They'll do it one time, that's it. And anyway, I just, to me, it gets to the point that Uber's gonna be the demand aggregator here. So that's why there'll be a winner in the AV wars, which I think there will be AV wars in the future. I think it'll all be good for, for consumers. And it'll take a while for the market to realize this, but in the meantime, you can buy Uber, and I think it's a really cheap price. That's today's debate. Scott, when you and I were talking about Uber in the past, the real question was, hey, can they ever make money? I mean, they went public with the biggest losses in recorded history. But the basic point you had to believe, and then you had to weather through a couple of years, and then you had to weather through COVID, which cut their business off at the knees, is can through scale, can they reach profitability and then

• 35:57Mark Mahaney?

  material profitability? And the answer to that was, I thought was yes, and then it kinda got proven two years ago, and then they finally started generating positive, you know, free cash flow. And ever since then, it is just hockey-sticked up the, the free cash flow. So I'll tell you what, Scott, I, you know, I, I cover three mega cap names now, Amazon, Meta, and Google. And my bet is, the fourth mega cap name I'll be covering, more than 500 billion market cap, is gonna be Uber.

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• 38:05Scott Galloway?

  We're back with Prof G Markets. Do you see any company sort of second order impact that might benefit from this AI boom? Does Spotify, you know, able to do, pull the same sort of trick that Meta has leveraging AI to improve their ad stack? Or do you, do you see any kind of second order beneficiaries of this AI boom?

• 38:23Mark Mahaney?

  Let me try a different interpretation. I think the market in the world is generally look for AI winners and it's, and it's, and it's kind of looked at the chip stack that, you know, for the winners. I mean, I gotta, can you buy enough Nvidia? That's been the point of view of the last year. And, you know, I don't cover Nvidia as a stock, but anyway, that's certainly been the market sentiment. And I liken this, Scott, not to the creation of the internet and not to the creation of the automobile, but to kind of the rollout of broadband, if you remember fifteen, eighteen years ago. And I just, just when I started my career, I think it was twenty years ago, and so a few years into my career. And, and I remember that people at the time were saying, well, how do I, you know, this country, I mean,

• 39:06Mark Mahaney?

  the world is going from narrowband to broadband. And they created a much better internet experience, much greater digital experience. And how do I invest against that trend? And people were, you know, buying chip companies at the time. They were buying networking infrastructure companies at the time, Cisco. They were buying cable companies and telcos. And, you know, my narrative, and I'm sticking to it, is at the time, I thought, well, why don't you buy the apps that people are using broadband to gain access to? Because, you know, your AOL experience, yes, AOL, and your, your, your Lycos experience, and your eBay experience, and your Amazon experience, they're all getting much better, and they don't have to pay much for it, you know, like, these companies are the major beneficiaries with having to do all the investments.

• 39:51Mark Mahaney?

  That turned out to be kind of right. And so I use that analogy today, and I'll give you a very different perspective, which is that the content companies, so Meta and Google are at the top of this list. I mean, they're major beneficiaries because they can use AI to improve both types of content that they generate. First is user-generated consumer content, and the other is advertiser content. The fancy word for that is ads. So AI is making the ads that perform better that are on Meta. And actually, Meta is using AI to automatically create ads for SMBs. And, and consumers, like, we're just going to get more and more tools. Like, I'm pretty certain that the change we're going to see in our Meta newsfeed

• 40:33Mark Mahaney?

  is going to be similar to, I forget, it was seven years ago when we went from pictures to video on Meta. And I just imagine that in the next three to four years, we're just going to be wowed by some of the new creative that's coming, that we get to see on, on social media platforms. TikTok could do this too. But it won't just be, you know, uh, you know, like it'll be, I don't know, somehow jazzed up visual experiences that you couldn't have done without AI. So I do think that there are content companies that are great derivatives and I don't think the market's quite figured that out yet. I may be wrong, but that's my point of view. And so in that content, you know, I think Spotify is anything that's a content company that can deploy AI to make its its content more entertaining, more engaging,

• 41:13Mark Mahaney?

  more addictive. Spotify could do it. Netflix could do it and is is doing it. I think Meta and Google can do it too.

• 41:19Scott Galloway?

  One of the things I like about you, Mark, is you make pretty bold calls. What's on your radar screen? When you're an analyst, you have buy and sell recommendations. What are your strongest buys right now?

• 41:28Mark Mahaney?

  Well, so, uh, you know, I I wrote this book and I focused on this expression, DHQs, dislocated high quality companies. And I think there are 10 maybe high qual- really high quality companies uh, that I that I cover, I think, kind of enduring, good fundamental assets. And you kind of wait for them to get dislocated. All stocks get dislocated and um, and then the sell off may be creating one of those. I thought Google earlier this year was a great dislocated uh, uh, stock in the wake of the image generation controversies. I think Uber right now is a great DHQ stock because everybody thinks that the consumer is going to go south and Uber's going, it's gonna, its business is going to get hit

• 42:08Mark Mahaney?

  and they're AV roadkill. So it's created a stock that went from 80 down to 60 and below 60. That to me, this, I, I want to buy Uber here. Now I throw in another one, Shopify. Shopify is, I think, is a very high quality asset. It's always been expensive, but that's pulled back a lot recently. And I think uh, mostly over investment concerns, investment cycle, margin concerns. So actually, that's one of the stocks I I really like uh, like here. So that, those are kind of in my hit list. Amazon was not one of my top picks, but it's sold off aggressively recently. I think from 200 down to $200 down to 160. So off the top of my head, whatever that is, that's uh, you know, 15% correction or something like that, 17% correction. I, I think that the, the recessionary fears are overblown.

• 42:52Mark Mahaney?

  I may be wrong. And if there is a recession, Amazon's going to be impacted. But if I'm right that those fears are overblown, this is when you buy Amazon at 160 rather than at 200. So that would be another one. And then if you want a crazy idea, Scott, I want to go down cap a little bit. I got a new surprise for you. Here's a small cap, less than 10 billion market cap, that I think can go into large cap land. And I think it's actually an AI derivative. It'll be a positive AI play, although it's perceived in the market as AI roadkill. And that's this language learning app, Duolingo, D U O L. And you know, I just, it's one of these serial entrepreneur run companies. Wonderful business model, viral growth. And it's something that can just take a TAM, total adjustable market, and just blow it up.

• 43:37Mark Mahaney?

  You know, massively expand it because they make learning a language fun, interesting, useful, engaging, addictive. They got it. So anyway, that's, that's my crazy idea of a small cap. And there are very few of them that go from small to large cap that could actually do it.

• 43:53Ed Elson?

  It feels like everyone's focusing on the picks and shovels so much so that we're not focusing on the products themselves. I E. The content, and I love that point that actually we should be thinking on what is the consumer? How is the consumer going to benefit from AI? I do want to sort of wrap up with just a playing out a scenario for you here. Many of our listeners are quite young, hardworking professionals. Most of them are looking to learn about the markets, invest, and they're probably investing pretty diligently. I would imagine that for many of them, this is the first market sell off they've seen. Major market sell off they've seen since they've been managing their own portfolios.

• 44:38Ed Elson?

  Maybe, maybe your parents got burned in 2008, but it didn't affect you directly. This is kind of the first time you're seeing a big red number in your own portfolio. I'd love to get your advice, Mark, as someone who's seen the booms and the busts. What would be your advice to someone in that position right now?

• 44:58Mark Mahaney?

  I'll try to simplify it with three points. You should expect these corrections. If you're an investor, you'll deal with these corrections. I don't know if it's on an annual basis, but every couple of years, like you're, you're always going to lose. At some point, you're going to lose money in stocks and so, you know, just. Just be ready for corrections. Secondly, when you see a correction, um, uh, there's this great article in the journal yesterday about how all financial managers are telling their clients, you know, don't panic, just stick with your portfolio. My reaction to that was, what do you mean? Like, if there's a correction, I should be buying stocks. You know, like, stick with my portfolio. Like, if I got cash, let's deploy it. You deploy it on these corrections. Do you do it immediately? No. Do you try to call the bottom? No.

• 45:42Mark Mahaney?

  I mean, that's a, you know, there's so many different things that could happen in the next, between now and the end of the year, that they could take the market up or down. Do your homework. Find stocks and companies that you really believe that you know well and you like, kind of Peter, Peter Lynch principle. And then just wait for them to go on sale. What's a sale? Something that's 20 to 30% off. And I know sometimes that's off of a huge spike. Okay, so maybe that's not a sale, but, you know, if it's, uh, if it's 20 to 30% off of kind of a decent run, that's a lot of subjectivity in there. You know, put a little bit money into that stock. Don't just sit on the sidelines. Like, are we supposed to buy low and sell high? So, you know, you're gonna see corrections. When you see corrections, you should get excited. Like, this is an opportunity. I've already identified companies that I like. I've got them on my buy list.

• 46:27Mark Mahaney?

  And somebody made them cheaper for me. You should be willing to step in, and you may not call the bottom. It may goes down to another 5% or 10%. That's okay. But just, that, that, that's the advice I would give to people, that you're gonna always have corrections. And the way you make money is you find high-quality companies and you wait till they get dislocated. And you're seeing that today, and I try to give a few ideas, and I'm sure some of them won't work, but, you know, like, I spent a lot of time trying to figure out what the high-quality names are. Figuring out when they bottomed is almost impossible, and it's okay if I don't call the bottom on a stock. But I use these as opportunities to invest in names that you, that you feel like you know well, that are high-quality.

• 47:04Scott Galloway?

  High-quality companies that are dislocated. Mark Mahaney is a Senior Managing Director and Head of Evercore's Internet Research Team. Mark has covered internet stocks for over 25 years and has been consistently recognized by Institutional Investor for his research, including 17 years as a top-three ranked analyst and five years as a number-one ranked analyst. He joins us from, where are you, Mark? Your, where's your office?

• 47:26Mark Mahaney?

  San Francisco.

• 47:27Scott Galloway?

  There you go. Joins us from the Bay Area. Mark, always good to catch up with you. Congrats on everything.

• 47:34Mark Mahaney?

  Thank you, Scott. Nice to see you. Nice chatting with you, Ed.

• 47:37Scott Galloway?

  Thank you very much, Mark.

• 47:47Ed Elson?

  Algebra of Wealth. Scott, I love the advice Mark just left us with, that for young people, a correction should be an opportunity, not a crisis. Would you agree with that?

• 47:58Scott Galloway?

  So, Ed, I think one of the great myths that has been fomented across your generation, by my generation, is that market corrections or a market meltdown should be avoided at all costs, even if that means intervention, or ramping up the debt with stimulus, or keeping interest rates artificially low. People are, if you think about investments, or their investing lifecycle, they're generally speaking in one of two stages. They're in the investment stage, so you're in the investment stage. You're trying to, you're working hard, trying to establish currency professionally such that you can make good money, and then hopefully have the discipline to spend less than you make, save money, deploy it. When you're

• 48:37Scott Galloway?

  in the investing part of your life, you want the markets to crash. Because the key to establishing wealth is getting it at the right price. I'm in the harvesting stage, and that is, well, I'm still making good money, I'm living really well, I'm spending a lot of money, and I'm even at some point going to start seeing my net worth go down. I'm going to start harvesting my investments. I want markets to be irrationally high. So, this Gestalt or Zeitgeist since 2008, where we will take out your credit card, keep interest rates artificially low, and act as if it's a tragedy if the market's off 2% or 3%, and start pounding on the table for Chairman Powell to intervene and cut rates. I think

• 49:21Scott Galloway?

  it's just such extraordinary bullshit and intergenerational theft, and represents something much darker, and that is that a belief that the economy should be totally centered around keeping me rich, despite the fact that the real opportunity for younger people is to get a chance to buy real estate and stocks, at some of the depressed valuations that I had the opportunity. Let me repeat, when you're your age, Ed, you want the markets to crash. Disruption is a good thing for your generation.

• 49:52Ed Elson?

  This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

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