Tech Faces Global Blowback to Tariffs

Key Concepts:

• Digital Services Taxes (DST)
• Retaliatory Risk
• Recession Risk
• Recessionary Resilient Stocks
• Tariff Exposure
• De Minimis Exemption
• Dislocated High Quality Companies (DHQ)
• Trough Multiples
• Cautious Guidance
• AI Impact on Productivity
• Recessionary Spectrum
• Performance Marketing vs. Brand Advertising

1. Impact of Digital Services Taxes and Tariffs:

• European Digital Services Taxes (DST) are viewed negatively and could significantly impact Internet companies.
• The degree of stock sell-off is determined by retaliatory risk and recession risk.
• Companies with high tariff exposure, like Amazon (due to manufacturing and export from Asia), are more affected. Amazon may need to absorb costs or pass them to consumers, potentially depressing demand.
• Meta is exposed to issues related to the removal of the de minimis exemption, affecting exporters and retailers.

2. Stock Performance and Recessionary Resilience:

• Stocks are bifurcating based on perceived recessionary resilience.
• Netflix and Spotify are considered relatively recession-resilient due to their inexpensive consumer subscription models.
• Amazon, Google, and Meta are trading down significantly (5-9%), with Amazon being the most affected due to tariff exposure.
• The speaker identifies a "recessionary spectrum" to categorize stocks based on their vulnerability to economic downturns.

3. Buying Opportunity and Investment Strategy:

• The current market conditions present a buying opportunity for high-quality companies at attractive valuations.
• The speaker looks for "Dislocated High Quality Companies (DHQ)" trading at trough multiples.
• While not advocating for taking a full position immediately, the speaker suggests "picking away" at these stocks.
• The tariff issue will create volatility, and recession risk needs to be considered when adjusting earnings estimates.
• The speaker suggests being cognizant of the potential for earnings estimates to come down by mid-single digits in a modest recessionary environment.

4. Earnings Season and Guidance:

• The March quarter results are expected to be reasonably solid for most tech companies.
• Cautious commentary about end-market demand for the June quarter is anticipated, leading to cautious guidance in line with or below street estimates.
• Currency headwinds are not expected to be as significant as initially anticipated.
• No expectation for stocks to trade up significantly based on upcoming earnings prints.

5. Capital Expenditure (CapEx) and Productivity:

• Companies are not expected to slow down their CapEx spending.
• Evidence suggests companies are getting a return on their investments, leading to productivity gains.
• Google reports that 25% of their code is now generated by AI, potentially leading to flat programmer headcount.
• Amazon reports 25% lower cost to serve in their most advanced automated distribution centers, indicating significant efficiency gains.
• The big unknown is whether demand will depress the margin expansion expected from AI and automation.

6. Impact of Trade Policies and Carve-Outs:

• The speaker focuses on the indirect impact of tariffs on consumer confidence and spending.
• The speaker is monitoring how trade policies and potential carve-outs for specific companies (e.g., Apple) will affect the sector.

7. Recessionary Spectrum and Stock Selection:

• The speaker categorizes stocks based on their recessionary resilience.
• Netflix and Spotify are considered the most recession-resistant.
• Shopify, travel names (Booking, Expedia, Airbnb), and advertising names with brand advertising exposure are more recessionary exposed.
• Meta is considered intriguing due to its attractive price point and status as the largest performance marketing platform outside of Google.
• The speaker is "chipping away" at Meta stock due to its potential to hold up fundamentally better than most assets.

8. Performance Marketing vs. Brand Advertising:

• Brand advertising is typically cut before performance marketing during economic downturns.
• Meta's focus on performance marketing makes it more resilient in a recessionary environment.

9. Notable Quotes:

• "I hunt for what I call DHQs, dislocated high quality companies."
• "You want to step in on the highest quality names when they're trading at trough multiples."
• "Google is telling you 25% of their code now is being generated by AI."
• "Amazon telling you that they have 25% lower cost to serve in their most advanced automated distribution centers."

10. Synthesis/Conclusion:

The speaker believes that while the internet sector faces headwinds from potential digital service taxes, tariffs, and recessionary pressures, the current market sell-off presents a buying opportunity for high-quality companies trading at attractive valuations. The key is to identify companies that are relatively recession-resilient and to carefully monitor the impact of trade policies and economic conditions on consumer demand and earnings estimates. The speaker is particularly interested in companies like Meta, which are well-positioned to weather a potential economic downturn due to their focus on performance marketing.