Nothing But Net (2021) is a practical guide to tech stock-picking for investors. Based on his years of experience as a Wall Street tech analyst, Mahaney outlines the dos and don’ts of choosing companies to invest in. Although the world of stocks is unpredictable, there are proven methods that any investor can use to become more successful.
Smart investment in tech stocks.
Every year, a city pops up in the Black Rock Desert, Nevada, for just 9 days. There’s a hospital, supermarkets, an airport, tents, and beats.
We’re talking about the Burning Man festival.
You’ve probably heard of it – but what you might not know is that this festival can help you with your stock investment decisions. At least, that’s what Mark Mahaney proposes in his book Nothing But Net!
So, what does this internet stocks expert see in a crazy desert festival? Well, read on to find out!
In this summary you’ll learn
- why Amazon beat eBay;
- why short-term trading and meme stocks just aren’t worthwhile; and
- the correlation between the Burning Man festival and tech excellence.
The most important rule is: prepare for setbacks.
When you hear the phrase “high quality tech stocks,” which names come to mind? Amazon, Google, Facebook, Netflix – these are all big names with impressive track records.
As an investor in tech stocks, you’re probably seeking safe options. Maybe even a guarantee of a good return.
But, unfortunately, in the world of stocks, there are no guarantees.
Even the best stocks can go wrong. And, yes, that includes the big names. In recent years, Amazon, Google, Facebook, and Netflix have all experienced “stock market corrections” – significant decreases in the market price of their stocks.
Take, for example, Netflix in June 2018. Wall Street was expecting 1.2 million new subscribers in the US. But the company added fewer than 700,000 subscribers. As a result, Netflix suffered a massive 40 percent correction.
Big, successful companies sometimes make missteps. Other times, they’re at the whim of external factors beyond their control. That’s what happened to Amazon in 2018. At the time, President Trump was involved in a trade war with China, and global economic growth was slowing down. It wasn’t Amazon’s fault, but these global events led to the company losing a third of its value due to a market sell-off.
The point is, it’s hard to forecast the future. The world is unpredictable, and so are stocks. This is something all investors have to be prepared for.
Mark Mahaney is a highly experienced tech analyst, but even he makes mistakes now and then. For instance, in 2017 he recommended that investors buy shares in the meal kit company Blue Apron. He’d done his research and was feeling confident about the company.
But then, within months, the company was falling apart, and the share price plummeted. Any investor who’d bought shares in Blue Apron on Mahaney’s recommendation lost 93 percent of their stake. And he’s an expert!
With stocks, there’s no such thing as a sure thing. From time to time, you’ll learn that the hard way. You will pick the wrong stocks. And the only thing you can do about it is to prepare for these setbacks.
In Mahaney’s nearly 25 years of analyzing tech stocks on Wall Street, he’s learned a thing or two. We’ll go over his key strategies so you, too, can improve your chances of success – although, remember, there are no guarantees!
Forget about short-term trading.
“I’d like to buy this stock ahead of the quarter. If I buy now, I can sell right after and make a nice little profit. So should I buy the stock?” As a stock analyst, Mahaney often gets these calls from investors. This short-term trading, or “playing quarters,” seems like a fun, attractive prospect. There’s huge demand for these kinds of trades.
Mahaney’s answer to these questions? Don’t do it. He is convinced that successful investment is all about long-term thinking.
It’s easy to get distracted by short-term stock volatility. The price goes up. The stock looks good. Why not trade?
Well, as you know, stocks are unpredictable in general – and quarters are especially unpredictable.
In order to successfully trade quarters, you have to be able to accurately assess not only the fundamentals of the stock – its intrinsic value – but also the short-term expectations. Easier said than done! Even the most seasoned hedge fund analyst struggles with these kinds of assessments.
For instance, look at what happened to Snapchat in March 2019. The company was doing well, with promising revenue trends. But then there was a sudden 10 percent correction in the stock. This went against everyone’s expectations, and it probably disappointed some short-term traders.
The Snapchat story just goes to show how meaningless short-term price movements can be. They don’t tell you anything.
The best investment strategy is to play the long game.
Amazon is a good example of why investors should think long-term. Between 2015 and 2018, Amazon traded up a staggering 386 percent. True, an investor who played quarters in this period would have made some money. But they also would have lost money on the four quarters when Amazon shares traded down. Compare that to an investor who stayed invested during the whole four-year period – this investor would have made significantly more money.
Why take the risk on quarters when you can simply stay invested in a company with good fundamentals? Trading based on short-term price fluctuations just isn’t worth the hassle.
And Mahaney’s not the only one espousing this opinion – you’ll find plenty of financial books saying the same thing. So, it’s safe to say we can forget about short-term trading. But if we want to make good returns on our investments, what should we be focusing on instead?
Search for companies that generate at least 20 percent revenue growth.
According to Mahaney, there are three financial metrics that tech investors should focus on: revenue, revenue, and revenue.
To understand why revenue is so important, let’s compare two tech companies – eBay and Netflix. You can probably guess which one Mahaney considers to be the better investment.
It certainly isn’t eBay! eBay failed as a long-term stock. It was profitable over a long period, but from an investor’s standpoint, that’s not good enough. eBay wasn’t able to maintain consistent, premium growth. In a 10-year period, the share price stayed exactly the same – not great.
Let’s compare that to Netflix. While it hasn’t been consistently profitable, Netflix was very successful in another area: it managed to sustain premium revenue and subscriber growth for years. This is strong evidence that it’s a great stock.
Here’s a simple rule for tech investors: search for companies that generate at least 20 percent revenue growth. It should be consistent growth, for at least five to six consecutive quarters. This suggests that the companies are both high-quality and high-growth. Good past performance is a reliable indicator of good future performance.
Let’s go back to Netflix for a moment, as there’s another useful lesson for investors here. Apart from the sustained growth we mentioned before, what did the company do that was so special?
Netflix successfully implemented growth curve initiatives, or GCI. A GCI is a step taken by a company to drive growth. It might be a new product launch, a price increase, or an expansion into a new geographic market. Netflix did all of these things, and it did them well – leading to a dramatic increase in revenue. As a result, its stock soared.
Those are two simple things a tech investor can keep in mind when choosing a stock. Look for companies with successful GCIs. And make sure the companies are generating around 20 percent revenue growth.
However, it’s worth remembering that revenue growth is only an indicator of high quality. It’s a result, not a cause. If you want to identify a good stock from the get-go, you need to know what causes high quality. According to Mahaney, there are four key drivers.
We’ll explore each of these next so you know exactly what you should be looking for.
The first two key drivers of revenue growth are product innovation and total addressable market.
Let’s look at the first two key drivers of revenue growth – product innovation and total addressable market.
Let’s start with product innovation, which is a little easier to understand and identify. The great thing about being an investor in tech stocks is that you’re probably already a consumer of many of these companies.
You can spot product innovation for yourself, and you can experience the benefits directly. Think of the annual release of a new, improved iPhone, for example – or the launch of the Amazon Kindle. The benefits of these innovations are clear.
Another advantage of product innovation is that it tends to be a “repeatable offense.” A company that comes up with a couple of impressive products is usually able to produce more.
Why is innovation a good thing? Exciting, innovative products can generate new revenue streams, as well as enhance existing ones. And more revenue means better stocks.
Let’s move on to the second driver of revenue growth: total addressable market, or TAM for short. Just like product innovation, TAM should be at the top of an investor’s mind when picking stocks.
A big TAM means greater opportunity for premium revenue growth, as well as an increase in scale with associated benefits. For example, when a company grows to a significant scale, it’s more likely to have competitive moats – in other words, a unique edge over its rivals. Essentially, the company with scale is the winner. And it all starts with having a large TAM.
Once again, we can use Netflix as an example of a company that got it right. Netflix started off as a DVD rental service. Then it introduced streaming – an exciting product innovation that also increased the company’s TAM. Netflix was able to expand internationally.
And it continues to expand, thanks to the global rise of smartphones. An increasing number of people use their smartphone as their main screen, so there’s reason to be optimistic about Netflix’s potential market expanding even further.
There are various ways for a company to increase its TAM, and they’re not always easy to identify. But a significant international presence is always a good sign. Google stood out right from the start because of its success across international markets.
The other key drivers of revenue growth are customer-centricity and good management.
You now know about product innovation and TAM. What else should you keep an eye out for when you’re choosing a company to invest in? Let’s take a look at two more factors to keep in mind.
First, consider the value for customers. Is the company customer-centric rather than investor-centric? If the answer is “yes,” you could be onto a winner.
Companies that put customers first tend to be more successful in the long run. That’s one of the reasons why Amazon beat eBay and became a much better investment opportunity. Back in the day, eBay used to be the king of online retail. But it was Amazon, not eBay, that was willing to sacrifice profits and disappoint investor expectations in order to benefit the customer. The launch of Prime in 2005 is just one example of Amazon’s customer-centric approach.
While it may have seemed risky, the strategy paid off long-term. Amazon took eBay’s crown to become the new, undisputed king of online retail – as well as a superior investment prospect.
Let’s move on to key driver number four.
Who’s responsible for a company’s ethos and vision? That’s right – the management. With a good team at the top, you’ll get good stock too.
And identifying good management is easier than you might think. There are a few simple, telltale signs that investors can look out for. It bodes well when the company is founder-led, for example. The management team of a tech company should have good tech backgrounds. And, ideally, leaders also have the following: a successful track record, long-term focus, talent for product innovation, and an obsession with customer satisfaction.
Can you think of a tech company team that ticks all those boxes? Ding, ding – it’s Amazon again!
There’s also one extra factor that may surprise you. Remember Burning Man, the festival we talked about in the beginning? Mahaney has noticed an interesting correlation between CEO attendance at the festival in the Nevada desert and tech company excellence. The CEOs of Amazon, Google, Apple, Facebook, and Tesla have all attended Burning Man at least once.
Coincidence? Maybe, maybe not. But festival attendance aside, you can’t deny that all these companies owe a lot of their success to great leadership. And great leadership is usually a strong indicator of well performing stock.
Applying logic will help you pick better stocks.
Now you know the four key drivers of revenue growth: product innovation, total addressable market, customer-centricity, and solid management. It’s good to feel sure of something and have a certain degree of confidence when picking stocks, right?
But remember, as we’ve already seen, investing in stocks is not a science. There’s always going to be some uncertainty. This is especially true for valuation frameworks. They can be useful to a point when you’re picking stocks, but don’t overestimate their importance. After all, valuation is an attempt to predict the future – to forecast revenues and cash flows in a world where everything can change overnight.
Just think of the impact of COVID-19, for instance. Many discounted cash flow valuations from January 2020 turned out to be inaccurate just a month later, when the pandemic began to wreak havoc throughout the world.
We can also use Uber as a case study. In 2019, Uber suffered an unprecedented net loss of $8.6 billion. But by early 2021, Uber’s share price was skyrocketing; it traded up 300 percent in a year. And yet, despite this dramatic turnaround, Wall Street still isn’t optimistic about Uber’s profitability – at least in the short term. With so much uncertainty, many tech stock valuations can essentially be seen as “fantasy valuations.”
That doesn’t mean we have to forget about valuations altogether. But investors should be careful with their approach – think logic rather than math. The main question you should be asking yourself is, “Does the current valuation seem more or less reasonable?” More or less. Don’t look for precise answers.
When you’re considering valuation, look at the company’s earnings. For a high-earnings company, try to assess whether the growth is sustainable. If the company has minimal earnings, on the other hand, consider whether there’s evidence that the situation will improve in the long run. For instance, maybe the company’s current earnings are being negatively impacted by major investments, but you can see future potential.
Even a company with a very high price-to-earnings multiple might turn out to be a good investment. Amazon and Netflix are both examples of this.
And while unprofitable companies can be challenging, you can apply logic here too. For example, ask yourself whether there are other companies with similar business models that are profitable. Assess the company’s overall potential for profitability based on your knowledge of the present.
You can’t predict the future, but you can use these logic-based tests. In doing so, you’re more likely to choose the right stocks.
Steer clear of fads, do your research, and stay humble.
You just completed the little tech stocks crash course – now you can invest with more confidence!
But wait! Before you rush off to buy shares, here are some final nuggets of wisdom.
First, don’t be scared off by a tech stock just because it seems expensive. When you’re buying tech stocks you also have to account for growth. Over time, high growth rates can transform what was initially an expensive stock into a reasonable stock – making it a worthwhile investment.
And, according to Mahaney, there’s still good reason to be optimistic about tech stocks. He’s been analyzing tech stocks for longer than anyone else on Wall Street – almost 25 years – and he’s still excited about the internet sector’s growth opportunities. But he also has a word of advice to anyone who’s new to stocks. If you’re one of the millions of new investors who got into stocks during the COVID-19 crisis, listen closely.
Avoid day trading, and steer clear of meme stocks. A meme stock is a stock that’s popular with millennial traders. It’s more about hype than the company’s fundamentals.
Day trading on these kinds of stocks can be fun. January 2021 was a thrilling time for many traders. Gamestop shares skyrocketed by 1,900 percent before correcting down by 90 percent the following month.
The problem with trading, though, is that it’s essentially like gambling in Vegas – you can have fun and make money, but you can also lose big-time. You’re much better off researching high-quality companies and investing instead.
And that brings us to our final point: research. Do your homework. Before investing in a tech company, assess it carefully using the criteria we’ve discussed. Of course, even then you’ll get it wrong sometimes. It happens to everyone – even the experts. Mahaney’s own mistakes have taught him to stay humble, and it’s an attitude he recommends to any investor.
So, if you think you’ve found the next Amazon, go for it! Just do your research, prepare for some possible bumps in the road, and have fun.
Investing in tech can be rewarding – and not just financially. Mahaney has found it immensely satisfying to watch the growth of the tech industry. Whatever comes next, it’s bound to be exciting.
Final Summary
Investing in tech stocks is a great way to make money. And you can increase your chances of success by investing in high-quality companies. Your best bet is a company with consistent revenue growth of 20 percent or more, product innovation, a big TAM, a customer-centric approach, and excellent management. Be prepared to play the long game!
About the author
Legendary analyst Mark Mahaney has been covering internet stocks on Wall Street since 1998, with Morgan Stanley, American Technology Research, Citibank, RBC Capital Markets, and now Evercore ISI. Institutional Investor magazine has ranked him as a top Internet analyst every year for the past 15 years, including five years as number one, and he has been ranked by the Financial Times and StarMine as the number-one earnings estimator and stock picker. In addition, TipRanks has placed Mahaney in the top one percent of all Wall Street analysts in terms of single-year stock picking performance.
Mark Mahaney is an analyst who has been covering internet stocks on Wall Street since 1998, with Morgan Stanley, Citibank, RBC Capital Markets, and Evercore ISI. In addition to being ranked one of the top internet analysts by Institutional Investor magazine for the last 15 years, he’s been named the top earnings estimator and top stock picker in the Internet Retail segment by the Financial Times and StarMine. TipRanks has put him in the top one percent of all Wall Street analysts in terms of one-year stock picking performance.
Genres
Money, Investments, Securities, Business, Stock Market, Economics, Finance
Table of Contents
Preface: The Oldest and Longest-Lasting Internet Analyst on the Street
Introduction: The Big Long
10 LESSONS
LESSON 1 There Will Be Blood . . . When You Pick Bad Stocks
LESSON 2 There Will Be Blood . . . Even When You Pick the Best Stocks
LESSON 3 Don’t Play Quarters
LESSON 4 Revenue Matters More Than Anything
LESSON 5 It Don’t Mean a Thing, If It Ain’t Got That Product Swing
LESSON 6 TAMs—The Bigger the Better
LESSON 7 Follow the Value Prop, Not the Money
LESSON 8 M Is for Management
LESSON 9 Valuation Is in the Eye of the Tech Stockholder
LESSON 10 Hunt for DHQs—Dislocated High-Quality Stocks
The 10-Lesson Lineup
Extra Credit
Acknowledgments
Index
Overview
Find the winners, avoid the losers, and build a solid Tech portfolio for the long run—with proven methods from legendary analyst Mark Mahaney
The Tech industry is the stock market’s hottest, most profitable sector, but it can be a roller coaster ride. Companies with great ideas can end up going nowhere, and some that dominate today will be sold at fire-sale prices in five years. “Sure things” can become “sore things” very rapidly. Nothing But Net provides the knowledge and insights you need to understand what’s really hot, to know what’s not, and to outperform other investors consistently and decisively.
Famous for his smart, savvy and unique approach to Tech stock investing, Mark Mahaney provides his 10 proven rules for succeeding as a long-term Tech stock investor—explaining everything he’s learned during almost 25 years of analyzing internet stocks, including:
- Why revenue growth and customer metrics―not earnings―are what matter most to Tech investors
- How to invest―not trade―in the great growth opportunities that lie ahead
- How to determine when high valuations are a warning sign and when they signal an opportunity
“I’ve watched the rise of some of the leading companies of today–Facebook, Amazon, Netflix, Google–and the fall of some of the leading companies of yesterday–Yahoo!, eBay, and AOL…,” Mahaney writes. “[F]iguring out which companies really are going to be dominant franchises is an extremely hard thing to do. But those who accomplished this were arguably able to generate some of the best portfolio returns in the stock market over the past generation.”
Nothing But Net provides powerful advice for the next two decades―lessons you can start applying today and use for years to come.
From one of the world’s leading tech stock investors-proven lessons on finding winners, avoiding losers, and building a durable tech portfolio for the long run. The tech industry is the stock market’s hottest, most profitable sector, but it can be a roller coaster ride for investors. Companies with great ideas end up going nowhere, and some that dominate today will be sold at fire-sale prices in five years. Nothing But Net provides the knowledge and insights you need to understand what’s really hot, know what’s not, and outperform other tech investors on a consistent basis. Famous for his solid, proven approach to tech stock investing, Mark Mahaney doesn’t emphasize picking the next best stock-he shows how to succeed as a tech stock investor. Mahaney explains the ins and outs of tech stock investing, including: Why dividends and strong profits-manna for value investors-can sometimes be the kiss of death for tech investors Why revenue growth and customer metrics-not earnings-are what matter most to tech investors How to invest-not trade-in the great growth opportunities that lie ahead. Nothing But Net provides common-sense advice, providing a tech/growth update along with a focus on the consumer tech stocks that have become household names, like Amazon, Apple, Facebook, Google, Netflix, Twitter, and Uber. Nothing But Net provides powerful advice for the next two decades-lessons you can start applying today and put to use for years to come.
Read an Excerpt/PDF Preview
In Nothing But Net: 10 Timeless Stock-Picking Lessons from One of Wall Street’s Top Tech Analysts, I share proven methods to find the winners, avoid the losers, and build a solid Tech portfolio for the long run.
How many calls have I made? One way to think about it is that every quarter I’ve had a chance to reevaluate a stock call. To affirm a call. To upgrade. Or to downgrade. So for fun math, over 20 years that’s 80 quarters, and with roughly 30 stocks under coverage, that’s . . . 2,400 calls! But that’s not the right way to think about it. Because with stocks always moving and news flow constant, there’s an opportunity to reevaluate stock calls daily. This is something some of the twitchtrigger hedge fund analysts do . . . and some of them do it very well. So, from this angle, that works out to 20 years, roughly 200 trading days a year, roughly 30 stocks, so that’s . . . 120,000 calls! My mind is spinning just thinking about that. Thankfully, that was never my mindset, though knowing why any one of my stocks was up or down materially on any given day was my job.
The simple point here is that I’ve made lots of stock calls. In arguably the most dynamic, best performing stock sector on Wall Street over the past two decades. And I’ve learned a thing or two along the way. Actually, Ten Key Lessons. And I’m going to share them with you here.
This playbook is intended to be used as a reference for the top ten lessons that I cover in much greater depth in my book. If you haven’t read the book yet, you can use this as a sneak peek to get excited or once you have finished the book, this can be an easy look back reminder of what you’ve learned.
— Mark S. F. Mahaney
LESSON 1: THERE WILL BE BLOOD . . . WHEN YOU PICK BAD STOCKS
If you invest in the stock market, you will lose money from time to time. Being a good stock-picker involves being both a good fundamentalist— correctly forecasting revenues and profits—and a good psychologist— correctly guessing what multiples the market will place on those revenues and profits. It’s almost impossible to get both of those exactly right most of the time.
There are always market shock events, like the onslaught of COVID-19 in early 2020, that can undermine the best-laid stock-picking plans. There will also be the bad stocks that you pick.
The odds of batting 1,000% are, well, one in a thousand. Markets change. Competitors compete. Managements make mistakes. And sure things can quickly turn into sore things.
LESSON 2: YOU WILL LOSE $… EVEN WHEN YOU PICK THE BEST STOCKS
Even best-in-class stocks aren’t immune from company specific major sell-offs. Facebook, Google, and Netflix—three of the best performing stocks of 2015–2020—all experienced major corrections (from 20% to 40%) at one point. In the case of Netflix, it was twice in a 12-month period. Despite fundamentals that were at times dramatically better than those of other tech stocks—and 95%+ of the S&P 500—these stocks experienced major setbacks before recovering to continue to materially outperform the market.
And even best-in-class stocks aren’t immune from broad market selloffs. In late 2018, in the wake of a broad market correction tied to trade war concerns, slowing global GDP growth, and rising interest rates, AMZN lost a third of its value, despite no change to its estimates or growth outlook. Have patience.
LESSON 3: DON’T PLAY QUARTERS
Successfully trading around quarters requires both an accurate read of fundamentals and a correct assessment of near-term expectations, a tricky task for individual (and most professional) investors to pull off. Trades around quarters can also be misleading and can cause investors to miss long-term fundamental and stock trends. Between 2015 and 2018, AMZN rocketed up 386%, with 4 of the 16 quarters during that period generating a material 10%+ one-day pop and four quarters generating a material 5%+ one-day slide.
Staying invested throughout would almost certainly have been more profitable than trying to play those quarters.
Invest in names with strong fundamentals and ignore short-term stock fluctuations, whether around quarters or not.
LESSON 4: REVENUE MATTERS MORE THAN ANYTHING
Over the long term, fundamentals really do move stocks, and for tech stocks, the fundamentals that matter the most are revenue, revenue, and revenue. Companies that demonstrate an ability to consistently generate 20%+ top-line growth can potentially provide good stock returns, almost regardless of their near-term profitability outlooks. That’s the 20% Revenue Growth “Rule.”
Consistent 20%+ top-line growth is rare (only about 2% of the S&P 500 generate this) and can often reflect large market opportunities, relentless product innovation, compelling value propositions, and topquality management teams. This is exactly what you want to be looking for in good long-term investing opportunities.
As a start, look for companies that have generated 20%+ growth for five or six quarters in a row.
That said, companies with sharply decelerating revenue growth—such as revenue growth rates that get cut in half over three or four quarters— are likely to work poorly as Longs (except when that cut is due to macro shocks like COVID-19), whereas stocks of companies that are successfully executing GCIs (growth curve initiatives) and generating revenue growth acceleration can be very good outperformers.
However, successful tech investing doesn’t mean being oblivious to profits. Profitless growth creates no value in the long run.
LESSON 5: IT DON’T MEAN A THING, IF IT AIN’T GOT THAT PRODUCT SWING
Product innovation matters. Relentless product innovation is one of the biggest drivers of fundamentals, especially revenue growth, and that’s what drives stocks. Successful product innovation can generate entirely new revenue streams (Amazon with cloud computing), replace existing revenue streams (Netflix with DVDs and streaming), and enhance existing revenue streams and boost key customer metrics (Spotify with podcasting and plausibly Stitch Fix with direct buy functionality).
Product innovation is also spottable. Some of the most interesting product innovation going on today is consumer driven. You’re a consumer. You can try out the services, and if you find one you love, it could be the making of a great stock.
Further, when you see one company’s innovations aggressively copied by others (e.g., Snap’s new features copied by Facebook), chances are that the first company is a legitimate innovator. Finally, product innovation is a repeatable offense. A management team that generates one or two impressive product innovations will likely have the ability to continue to generate more innovations.
LESSON 6: TAMS —THE BIGGER THE BETTER
TAM matters. The bigger the Total Addressable Market, the greater the opportunity for premium revenue growth. They are rare, but look for companies that have the potential to “pull a Google”—to generate premium revenue growth from scale. As a rule of thumb, a company with a single digit percent share of a large TAM might be an ideal candidate for tech investors to consider.
TAMs can be expanded. By removing friction and by adding new use cases, TAMs can be made larger. That’s essentially what Uber and Lyft did over the years. By lowering prices, increasing the number of drivers on their platforms, reducing wait times, and making payments and tipping seamless, Uber and Lyft expanded the use cases for and the appeal of ridesharing. There are also two specific steps that companies can take to expand their TAMs—expand into new geographic markets and generate new revenue streams.
Sometimes TAMs are hard to ascertain, especially when a traditional industry is being disrupted, and creative new approaches are required. This was the case with Spotify, which was attacking two well-known markets (the recorded music industry and radio advertising) but was doing it in a way that potentially meant it was facing a much bigger market than appeared at first listen.
Large TAMs can help drive growth that can lead to scale, which has intrinsic benefits: experience curves, unit economics advantages, competitive moats, and network effects.
LESSON 7: FOLLOW THE VALUE PROP, NOT THE MONEY
Follow the consumer value proposition. Some of the best performing stocks of the past decade belong to companies that prioritized customer satisfaction way over near-term investor concerns. Amazon may well be the poster child here. The company consistently demonstrated a willingness to invest aggressively to offer a more compelling value proposition, even at the sacrifice of near-term profits (e.g., Prime).
Investor-centric companies can make subpar investments. eBay and Grubhub are companies that didn’t focus enough on innovating to meet consumer needs, in part, I believe, out of a strong desire to preserve highly profitable business models. Because of this, both companies ended up providing mixed results for long-term investors.
Even though compelling consumer value propositions can be expensive to build and maintain, they can eventually carry positive business model effects. Some of this is straightforward in terms of deep customer loyalty. But compelling value propositions can also enable pricing power flywheels, which is what both Amazon and, especially, Netflix have benefitted from.
LESSON 8: M IS FOR MANAGEMENT
Management teams really matter. The quality of the management team is arguably the single most important factor in tech investing. In the long term, stocks are largely driven by fundamentals, and fundamentals are largely driven by management teams. Get the management team right, and you’ll likely get the stock right.
Know what to look for in a management team. Founder-led companies (practically all the biggest tech stocks have been founder-led), long term orientation (like Zuckerberg with 1-, 5-, and 10-year goals), great industry vision (Hastings essentially inventing streaming), a maniacal focus on customer satisfaction (read the Amazon shareholder letters), deep technology backgrounds and operating benches, a deep focus on product innovation, and the ability to be forthright with employees and investors about mistakes and challenges.
Unlike investment funds, for management teams, past performance is an indicator of future performance. When you have management teams that have built successful track records, you stick with them.
LESSON 9: VALUATION IS IN THE EYE OF THE TECH STOCKHOLDER
Valuation should not be the most important factor in the stock-picking decision process. Your overriding valuation action question should always be: Does the current valuation look ballpark reasonable? High-growth tech stocks can at times look expensive, but that doesn’t make them bad stocks. Look at P/E multiples on a growth-adjusted basis. High-earnings growth stocks and high-earnings-quality stocks warrant high P/E multiples. In the case of companies with robust earnings, a P/E multiple in line with or at a modest premium to a company’s forward EPS growth is ballpark reasonable. High-quality stocks that trade at a discount to premium growth rates can make excellent investments for long-term investors. Both PCLN and FB traded for long stretches at discounts to their growth rates, which helped create great long opportunities with both stocks. In the case of companies with minimal earnings, you can expect to see super high (>40x) P/E multiples, but these can still be good investments. Both Amazon and Netflix proved this. The key action questions:
- Are current earnings being materially depressed by major investments?
- Is there a reason to believe that long-term operating margins for the company can be dramatically higher than current levels?
The case of companies with no earnings provides the toughest valuation challenge, but four logic test questions can help determine whether a valuation is ballpark reasonable:
- Are there any public companies with similar business models that are already profitable?
- If the company as a whole isn’t profitable, are there segments within the business that are?
- Is there a reason why scale can’t drive a business to profitability?
- Are there concrete steps that management can take to drive the company to profitability?
LESSON 10: HUNT FOR DHQS — DISLOCATED HIGH-QUALITY STOCKS
One of the best ways to make money as an investor in high-growth tech stocks is to identify the highest-quality companies and then to buy them or add to positions when they are dislocated. Investing in high quality companies—marked by premium revenue growth and driven by large TAMs, relentless product innovation, compelling customer value propositions, and great management—reduces fundamentals risk. Buying when they are dislocated—20 to 30% corrections and/or when stocks are trading at a discount to their growth rates—reduces valuation/multiple risk.
Every single high-quality company gets dislocated at some point or another, providing patient long-term investors with plenty of opportunities. Even the highest-quality stocks I covered over the last five years (Facebook, Amazon, Netflix, and Google) were each dislocated a handful of times over that period.
The key indicator to sell a stock is a material deterioration in the fundamentals of a company. To be specific, when revenue growth decelerates materially (50% deceleration within a year or less, adjusting for comps and macro shocks) or when revenue growth materially dips below 20%, again adjusting for comps and macro shocks.
THE 10 TAKEAWAYS
- There Will Be Blood…When You Pick Bad Stocks
- You Will Lose $… Even When You Pick The Best Stocks
- Don’t Play Quarters
- Revenue Matters More Than Anything
- It Don’t Mean a Thing, If It Ain’t Got That Product Swing
- TAMs–The Bigger the Better
- Follow the Value Prop, Not the Money
- M Is for Management
- Valuation Is in the Eye of the Tech Stockholder
- Hunt for DHQs–Dislocated High-Quality Stocks
Video and Podcast
Review/Endorsements/Praise/Award
“People always ask me what investment books can help them understand how to value technology stocks. I gave up suggesting them a long time ago; nobody knew enough or had enough history with the most important sector in the market. And then along comes Mark Mahaney with Nothing But Net. The problem’s solved; I have the answer. Read this book. It’s the most comprehensive, self-deprecating, and insightful book I have come across that explains how tech stocks really work: which ones go up, which ones go down, from the only person who has opined for the entire era. I thought I knew these stocks cold; I learned a ton. You will too.” – Jim Cramer, Host of Mad Money and Co-Founder of TheStreet.com
Timeless insights into stocks, management, and what makes a company worth investing in. Required reading for the next generation of investors. – Scott Galloway, Professor of Marketing at NYU Stern School of Business, co-host of the Pivot podcast, and author of The Four
“Mark’s book will help all investors — from novice individual investors to seasoned institutional investors — gather the confidence to invest in the future today. Nothing But Net offers important investment lessons that I have not forgotten and, thanks to his analysis, will never forget.” – Cathie Wood, Founder, CEO & CIO of Ark Invest
“Mark has been one of the sharpest, smartest and most reliable analysts on my show for the last 10 years. He takes it to the next level in Nothing But Net a remarkably personal, witty, engaging, yet informative read. You’ll laugh and learn, not just about picking tech stocks, but also the meteoric rise of the world’s most dynamic and valuable companies, and where they’re going next.” – Emily Chang, Host and Executive Producer of Bloomberg Technology, author of Brotopia
“This fun, informative book is Peter Lynch meets Michael Lewis. I’ve long known that Mark Mahaney is a top player, thinker, analyst, investor, and human being, and now I’ve learned, he’s also an amazing writer. His 10 Lessons About Tech Investing are really insightful and useful. Read this book.” – Ed Hyman, Chairman of Evercore ISI and the #1 Ranked Analyst for Economics for 40 years by Institutional Investor
Wall Street analyst Mark Mahaney has been watching internet stocks rise, fall and confound investors since the start of the Web era. In this personable, compelling book, Mahaney reflects on both the hits and misses from his storied career while dishing out critical tips on how to appraise tech companies, when to invest, and how to stay sane through it all. – Brad Stone, author of The Everything Store and Amazon Unbound