Tech investors ‘have no conviction’ into pending recession: Jefferies analyst

Jefferies Senior Analyst Brent Thill joins Yahoo Finance Live to discuss the current environment for tech stocks as well as Amazon's stock valuation.

Video Transcript

AKIKO FUJITA: Well, Amazon's annual fall event kicked off yesterday. And the company announced some new products from across its many brands, including new versions of the Amazon Echo and Fire TV, but today, Amazon getting caught up in the wider tech selloff.

To discuss it all, let's bring in Brent Thill. He's Jefferies senior analyst. We've also got Yahoo Finance's Allie Garfinkle, who covers tech for us. Brent, good to talk to you. Let's start with the selloff today. Certainly, tech not immune to this. They are the biggest laggard when you look at where the NASDAQ is. What do you think is happening?

BRENT THILL: I think what's happening now is that investors have no conviction into pending recession. So what's happened with 30-year mortgage rates going higher, the consumer softening, where the Fed is looking for job losses, ultimately, all this data has been incredibly negative. Jefferies' internal economists are forecasting a bigger pullback in the economy in '23, not in '22. So all the efforts that the economy-- we're going through on all these steps that are going to slow things down will have a bigger impact into next year.

Cost of capital is going up, and we're just seeing continued aversion for buyers to come in to tech stocks. And I think ultimately, we just have to get-- this is just time. It's just going to take time to get through this. We think it may take until early '23 before we wash out. Many of these stocks have obviously been hit hard across tech, down 30%, 40%, upwards of 70% in some cases, if you're a higher beta name.

So right now, it's a buyer strike. You don't have the long onlys involved. You have mainly the hedge funds that are trading against each other. And the retail investor is lost right now because effectively, they don't know what to do right now. So it's just time. And it's unfortunate, but all the leading indicators we see are negative, other than valuations in the stocks already embedding a lot of the bad news that's pending that's about to come and hit.

AKIKO FUJITA: And Brent--

BRENT THILL: So I don't want to be super bearish, but ultimately, just the data that we continue to see across our firm is not pointing in the right direction.

AKIKO FUJITA: Yeah, Brent, let me follow up on that. I mean, included in the selloff, obviously, some of those big tech names that you do follow. There has been, even before this most recent pullback, these questions about companies that were high growth, questions about profitability around them. I mean, are there any names that investors should get in on that could be actually a good opportunity, given the huge dips that we're seeing right now?

BRENT THILL: I think there are. I mean, I think you have to basically say, look, my comments are predicated on a three to five-year view, not a next three to six months. Right now, no one knows what the next three to six months look like. It doesn't look good, from what we can tell from a data perspective. But over the next three years, these are great opportunities to buy and hold.

Companies like Adobe, Microsoft, even Amazon, that we look at Amazon in the sum of the parts and look at their digital business versus the retail business and believe that you're getting the retail business effectively for free. No one cares about e-com right now. E-com names have a real negative bias. But Amazon will figure out a way through this. And everywhere we turn, everyone's running on AWS, which is their cloud business.

So we have huge conviction in Amazon over a period of time, over a three-year period. And I think what you're seeing is investors are upscaling the quality, going to hire higher quality names. But I think across the board, we're seeing a real weakening consumer. You're seeing that-- I've seen some of the Apple data that's come out from some of the checks. You've seen it on mortgage rates. That's going to stall housing. There's a lot of negative data in the short-term.

So my sense is, it may take until later this year, early '23, for these companies to really fully cut numbers and get things set right before we trough. So I think there's still more choppiness pain ahead. But I do think we're in the zone where you start to pick away at these names, have a three-year horizon, and I think from that perspective, you're going to do well because you look at the valuations.

And again, if I told you, you could get Amazon's retail business for free right now, many people were like, what do you mean? And I'm like, we can show it to you. Like, that we think the digital business is worth $1.1 trillion, and the retail business is not embedded. So those are a few names that we're looking at.

ALLIE GARFINKLE: So, Brent, talk to me a little bit about what you're expecting to see from that retail business this holiday season.

BRENT THILL: I think it's softer. I mean, you've seen all the data. I mean, Walmart, all the peers are staffing at a lower capacity this year because I think everyone would have seen all the data we see across all the checks in tech and in consumer are softening. So I think it's going to be a tough year.

Look, when you look at what's happened with rates and you look at what is happening, even the card data that came out today at a CarMax, I mean, there is a clear overhang that's coming from every single angle, from consumer electronics to cars to houses to-- again, don't want to be a grizzly bear, but the data right now is not good. So what does that mean for shopping in the holiday? I think it means fewer items. I think it's-- consumers are going to be more selective. And I think it's going to be harder.

Now, the good news for Amazon is that we're going back to normal, right? We went from living at home, buying everything online, to then back back in stores, to now, I think we're kind of going back to a hybrid store and e-com. So I do think e-com will do well. We do think that the sentiment is awful and terrible on a lot of these stocks. And so we, as a firm, have continued to look over the long haul on Amazon.

We like Etsy, which is helping with, really, kind of these really procured, high-end, unique items that you can't get on Amazon. And we think there's a handful of other names, but those are a couple that we like over the long-term.

ALLIE GARFINKLE: And I'd love to get your sense of other risks surrounding Amazon, Brent, particularly surrounding antitrust. We've saw those big acquisitions of iRobot and One Medical. And I wondered if you're assessing that risk and if you're thinking about it.

BRENT THILL: It's the number one question asked. It comes up in every investor conversation. And I think yes. And clearly, I don't think they're going to go block a vacuum cleaner company getting bought. I don't think they're going to have an issue there. But does it prevent Amazon from doing other software acquisitions, other larger e-com acquisitions? I think the answer is yes.

All you have to do is look at Google. Ruth, the CFO of Google, has been buying stock hand over fist as the stock goes lower, which is awesome. And she's doing the right thing to protect investors because she can't deploy the cash in M&A. They can't buy anything. And so I think the good news is there's tons of innovation inside of Amazon, Google, others in tech. And I think they don't necessarily need to go out and do big deals. They're going to do smaller talking deals.

So it's a question. It's an overhang. It certainly is-- every investor conversation in every meeting I go into, it's the number one question. And again, I think that the way they mitigated this risk is, they have been able to do M&A. They've had to be careful. You look at the news today, right? They make a big deal about expanding pay and benefits for frontline employees. They're doing the right thing.

So as long as they're being balanced and doing the right thing for their employees and for their shareholders and for the ecosystem, I think Amazon, again, is a huge employer, right? So that the government has to be careful in how much they regulate them because they are an incredible, incredible, vibrant source of the economy that's helping many in their daily lives. So there's a fine balance both have to walk. And I think that Amazon's doing that.

AKIKO FUJITA: Yeah, and questions around regulation, antitrust, yet in focus again today, given those latest comments from Senator Warren. Brent, it's good to have you on a day like today, and we're trying to make sense of the markets Brent Thill, Jefferies senior analyst, joining us there.