About the Author
Mark Mahaney is a senior analyst at Evercore ISI on Wall Street, and previously worked at Morgan Stanley and Citigroup.
The reason to Recommend this book
In Nothing But Net, Mahaney shares lessons learned from 25 years of stock analysis: Which companies succeed? Which fail? He identifies the key factors contributing to the success of high-growth tech stocks.
The factors for high-growth tech stock success outlined in the book are highly recommended reading for investors.
Key Takeaways
Investors Must Also Be Psychologists
The difficulty of stock picking lies in the fact that you might be a brilliant fundamental investor, but not a good stock picker. To succeed in investing, you must also be a skilled psychologist. You must predict that the market will also value your predictions of fundamental performance. The market will predict whether the fundamental valuation multiple will be high or low, above or below the current stock valuation, and many things can go wrong here.
Stock might be unfairly punished
Companies often find themselves in situations where their financial reports align with Wall Street’s expectations, or even exceed them, or forecasts surpass expectations. Essentially, the growth outlook and fundamentals remain unchanged, yet the stock price still falls sharply—examples of this abound. Sometimes, stock price fluctuations become decoupled from the company’s fundamentals, meaning the stock is unfairly punished by the market; even the best companies can experience this. This is why it’s best to ignore short-term stock price fluctuations when investing in stocks. Short-term fluctuations are sometimes truly meaningless; a long-term perspective is essential for long-term success.
Don’t bet before earnings reports
Don’t bet before earnings reports because (1) it’s based on forecasts, not fundamentals. (2) Short-term stock price fluctuations are rarely related to the company’s fundamentals. (3) Betting on a single company’s quarterly earnings results is equivalent to betting your money on the data of a few companies, while Wall Street has vast resources to conduct investigations, giving it a significant advantage. (4) Predicting the results after earnings reports are released is inherently difficult. Revenue, revenue, and more revenue
Revenue is more important than profit
In the long run, fundamentals drive stock prices, and for high-growth tech stocks, the most important fundamental is revenue, revenue, and more revenue. Companies that can consistently grow revenue at a rate exceeding 20% are likely to offer excellent returns on investment and are almost unaffected by short-term profitability. In the S&P 500, only about 2% of companies can achieve revenue growth exceeding 20% for five consecutive years, and these stocks typically outperform the market. This is a fundamental clue for finding high-quality, high-growth tech stocks.
Companies with Revenue and Customer Growth
Companies with revenue and customer growth: (1) The author believes that revenue growth exceeding 20% needs to be sustained for at least five to six quarters. (2) The subscription model provides a buffer when revenue growth slows significantly. (3) The subscription model reduces the proportion of marketing expenses to total subscribers. Pandora used in-app advertising, Spotify used a subscription model—and Spotify ultimately succeeded.
Why did Google succeed?
Factors contributing to Google’s success: First, Google dramatically improved accessibility, making it relatively easy, fast, and free to find anything in the world. Second, Google created the best advertising and marketing method ever; you only pay when someone visits your website. You can calculate the ROI of Google search advertising. Furthermore, Google’s potential market was far larger than Booking.com, which is the main reason why Google’s stock later outperformed Booking.com.
Customer first companies are destined to succeed
Companies with attractive customer value propositions, whether in terms of market share or market capitalization opportunities, are better than companies with good business models. In other words, customer-centric companies are better than investor-centric companies that achieve scale—this was a major factor in Amazon’s later success. Amazon Prime is the best example in the business world and a major driving force behind Amazon’s success. Another example is Grubhub, which only allows restaurants it can deliver to, while DoorDash allows all restaurants.
Identify companies with strong management teams
Qualities of a strong management team:
- A company led by its founder
- Long-term orientation
- A strong industry vision
- A passionate focus on customer satisfaction
- Deep technological background and team members
- A deep focus on product innovation
- The ability to recruit top talent
- Confidently explaining mistakes and challenges to employees and investors
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