First came the Magnificent Seven. And then Wall Street analysts began doubting the strength of the tech sector, quickly coining the term "Fantastic Four" to exclude several of the biggest laggards in 2024. Now, Evercore ISI is pairing together a new group of tech stocks as big as the previous two — "the Electric Eleven," comprised of Airbnb (ABNB), Alphabet (GOOG, GOOGL), Amazon (AMZN), Booking Holdings (BKNG), DoorDash (DASH), Meta Platforms (META), Netflix (NFLX), Shopify (SHOP), Spotify (SPOT), The Trade Desk (TTD), and Uber (UBER).
Evercore ISI Senior Managing Director and Head of Internet Research Mark Mahaney explains where the similarities between these companies lie and their core drivers.
"I think most of these digital-first companies are beneficiaries of gen AI. They're going to be able to figure it out, they're going to deploy, or they already have in ways that improve products and processes and they're and I think shareholders will benefit from that," Mahaney explains.
JOSH LIPTON: A new note from Evercore ISI. Crowding a new set of stocks is the electric Eleven. A few familiar Magnificent Seven names making the list too, as well as some companies with promising growth opportunities.
For more, we have the analysts behind that note. Evercore ISI Senior Managing Director and Head of Internet Research, Mark Mahaney. Mark, it is always good to have you on the show.
So move over Magnificent Seven, it's all about the Electric Eleven now, Mark. I'm just interested. Before we dive into the specific names, Mark, are there certain kind of common themes in this basket or are there certain kind of common features attributes that these names share?
MARK MAHANEY: OK, Josh, I don't want to get too carried away with the basket. I just look at about 16, 18 stocks that we cover in the large cap internet space. And fundamental trends amongst those 11 companies, I'd call them the best names that are the best names that we look at.
I would never put together a basket of stocks just in one sector. But if you wanted to just in the internet sector, I'll do that. But if you were, those are the best names include Amazon, Google, Meta. These are all names that as a whole can compound at double digit revenue growth for the next couple of years with margin expansion.
And what's also new is that this group includes more and more dividend payers. There's like four of them in there now. And then I think there'll be more because I think Google is going to join that dividend list.
And then companies that are also buying back their stock. So you've got 20% earnings growth. So that's premium earnings growth to the market, which is more S&P 500 usually grows earnings high single digits, very low double digits.
So it's just a premium group. And if can find them at reasonable valuations, which is where I think most of these names are. But not all of them, most of them are.
And by the way, the last point is if there's one major trend out in the market today, I'm sure, I know it's been overhyped. But it's still very important. And that's generative AI.
I think most of these digital first companies are beneficiaries of GenAI. They're going to be able to figure it out. They're going to deploy it, or they already have in ways that improves products offerings and processes.
And I think shareholders will benefit from that. So, yeah, I like these highest quality names in the internet sector and about 11 of them.
JULIE HYMAN: Mark, it strikes me here. You also talk about in your note on this that demand trends are looking strong. But you can talk about internet overall.
But even for the sort of subgroups that you're talking about whether you're talking about cloud here, whether you're talking about advertising, and retail mobility, and delivery, and then in entertainment also. And it doesn't seem like from reading between the lines of your note, that all of that has to do with GenAI. So what is going on here that is supporting the demand across these different sort of sub sectors within internet.
MARK MAHANEY: You're right. So I looked at the internet sector. It's got at least nine verticals within it. Everything from retail, to dating from cloud, to travel.
And not all of them are going to be accelerating this year. Travel actually decelerates because we've had such a strong travel cycle post-COVID. But most of the other sectors, I think are accelerating.
I think cloud revenue growth is going to be faster in '24 than in '23 for names like Google, and Amazon, and probably Azure, too, at Microsoft. I think retail will be faster for names like Amazon. And it's a series of things.
Part of it is, frankly, we started off. And this is also the case with advertising. So that's Google and Facebook. So I just mentioned a lot of market cap there.
And we started off last year if you remember with a lot of unease, uncertainty, about the global economy, whether you're heading into a recession. There was a lot of softness in the end markets.
That isn't the case now. And markets have firmed up. So that's part of it.
You've got easing comps. But then each of these areas has a couple of very specific catalysts on the advertising name. You do have the elections. You have the Olympics. Those are big cyclical events for the entertainment names.
That's Stiff, Netflix. They both have successfully implemented new price increases on very large user bases. And so that causes acceleration in growth rates.
On retail, I'd also throw out this expedited shipping, this faster and faster shipping that Amazon has been rolling out for a while for about a year now, actually. And I think that causes this what I call shipping elasticity. The faster you ship, faster people shop.
So I think that's also a factor. So there's a couple of general factors. But there's also vertical specific factors that are causing growth rates to be the same. And in some cases, better this year than last year. That's good for stocks.