Mark Mahaney 10 Timeless Lessons for Picking Tech Stocks in “Nothing But Net”

“Nothing But Net” by Mark Mahaney is a game-changing guide for tech stock enthusiasts. This insightful book unveils ten timeless lessons that can transform your approach to picking winning tech stocks. Mahaney’s expert analysis and practical advice make this an essential read for anyone looking to thrive in the dynamic world of tech investing.

Dive into this review to unlock the secrets of successful tech stock picking and take your investment strategy to the next level.

Genres

Investing, Technology, Finance, Business, Stock Market, Wealth Management, Personal Finance, Economic Analysis, Corporate Strategy, Market Research, Money, Investments, Securities

Mark Mahaney, a seasoned tech analyst, shares his wealth of experience in “Nothing But Net.” The book outlines ten critical lessons for identifying and investing in promising tech stocks. Mahaney emphasizes the importance of understanding a company’s total addressable market, evaluating management quality, and recognizing disruptive innovations. He delves into the significance of customer satisfaction, product quality, and competitive advantage. The author also stresses the need for investors to stay updated with industry trends and maintain a long-term perspective. Throughout the book, Mahaney illustrates his points with real-world examples from tech giants like Amazon, Google, and Netflix, providing readers with practical insights they can apply to their investment strategies.

Review

“Nothing But Net” stands out as a valuable resource for both novice and experienced tech investors. Mahaney’s writing style is engaging and accessible, making complex concepts easy to grasp. The book’s strength lies in its practical approach, offering actionable advice backed by real-world case studies. Mahaney’s insider perspective provides unique insights into the tech industry, giving readers a competitive edge. While the book focuses primarily on large, well-known tech companies, it could benefit from more examples of smaller, emerging players. Despite this minor limitation, “Nothing But Net” delivers on its promise of providing timeless lessons for tech stock picking. It’s a must-read for anyone looking to navigate the ever-changing landscape of tech investing with confidence and skill.

Smart investment in tech stocks.

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.

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.

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