Nothing But Net

Introduction

In the world of stock investments, tech stocks have become increasingly popular and lucrative. However, navigating this complex landscape can be challenging, even for experienced investors. In his book "Nothing But Net," Mark Mahaney, a seasoned tech analyst with nearly 25 years of experience on Wall Street, offers valuable insights and strategies for smart investment in tech stocks.

Mahaney's approach is unique and engaging, drawing unexpected parallels between successful tech companies and events like the Burning Man festival. His goal is to help readers understand the key factors that drive success in tech stocks and how to identify promising investment opportunities.

This book summary will explore Mahaney's main ideas, strategies, and insights, providing a comprehensive guide for anyone interested in investing in tech stocks. We'll cover everything from the importance of long-term thinking to the key drivers of revenue growth, and even touch on some surprising correlations between tech excellence and festival attendance.

The Unpredictable Nature of Tech Stocks

One of the first and most crucial lessons Mahaney imparts is the inherently unpredictable nature of tech stocks. Even the most successful and well-known companies can experience significant setbacks and market corrections.

Prepare for Setbacks

When we think of high-quality tech stocks, names like Amazon, Google, Facebook, and Netflix often come to mind. These companies have impressive track records and seem like safe bets for investors. However, Mahaney emphasizes that there are no guarantees in the stock market, even for these tech giants.

He provides several examples to illustrate this point:

1. Netflix in June 2018: The company added fewer than 700,000 new subscribers in the US, falling short of Wall Street's expectation of 1.2 million. This resulted in a massive 40 percent correction in Netflix's stock price.

2. Amazon in 2018: Despite no fault of its own, Amazon lost a third of its value due to external factors such as President Trump's trade war with China and slowing global economic growth.

3. Blue Apron in 2017: Mahaney himself recommended buying shares in this meal kit company, only to see it fall apart within months, resulting in a 93 percent loss for investors who followed his advice.

These examples serve to highlight the unpredictable nature of the stock market and the importance of being prepared for setbacks. Even experts can make mistakes, and unforeseen circumstances can impact even the strongest companies.

The Futility of Short-Term Trading

Given the unpredictable nature of stocks, Mahaney strongly advises against short-term trading or "playing quarters." While it may seem attractive to buy a stock before a quarterly report and sell immediately after for a quick profit, this strategy is fraught with risks and uncertainties.

Mahaney argues that successful investment is all about long-term thinking. Short-term stock volatility can be distracting, but it often doesn't reflect the true value or potential of a company. To illustrate this, he shares the example of Snapchat in March 2019. Despite promising revenue trends, the company experienced a sudden 10 percent correction in its stock price, defying expectations and likely disappointing short-term traders.

The author emphasizes that accurately assessing both the fundamentals of a stock and short-term expectations is extremely challenging, even for seasoned hedge fund analysts. Instead, he advocates for a long-term investment strategy, using Amazon as a prime example.

Between 2015 and 2018, Amazon's stock price increased by an impressive 386 percent. While short-term traders might have made some money during this period, they would have also lost money in the quarters when Amazon's shares traded down. In contrast, an investor who remained invested throughout the entire four-year period would have seen significantly higher returns.

This example underscores the benefits of staying invested in companies with strong fundamentals rather than trying to time the market based on short-term price fluctuations.

The Importance of Revenue Growth

Having established the importance of long-term thinking, Mahaney introduces what he considers the most crucial metric for tech investors: revenue growth. He emphasizes this point by stating that the three most important financial metrics for tech investors are "revenue, revenue, and revenue."

The 20 Percent Rule

Mahaney provides a simple yet effective rule for tech investors: look for companies that generate at least 20 percent revenue growth consistently for five to six consecutive quarters. This sustained growth is a strong indicator of both high quality and high growth potential.

To illustrate the importance of revenue growth, Mahaney compares two tech companies: eBay and Netflix.

1. eBay: Despite being profitable over a long period, eBay failed to maintain consistent, premium growth. As a result, its share price remained stagnant over a 10-year period, making it a poor long-term investment.

2. Netflix: While not consistently profitable, Netflix managed to sustain premium revenue and subscriber growth for years. This consistent growth made it a highly successful stock.

Growth Curve Initiatives (GCI)

In addition to consistent revenue growth, Mahaney introduces the concept of Growth Curve Initiatives (GCI). These are steps taken by a company to drive growth, such as new product launches, price increases, or expansion into new geographic markets.

Netflix serves as an excellent example of successful GCI implementation. The company effectively executed various growth initiatives, leading to dramatic increases in revenue and, consequently, a soaring stock price.

By focusing on companies with successful GCIs and consistent revenue growth of around 20 percent, investors can increase their chances of identifying high-quality tech stocks with strong potential for long-term success.

The Four Key Drivers of Revenue Growth

While revenue growth is a crucial indicator of a high-quality tech stock, it's important to understand what drives this growth. Mahaney identifies four key drivers that investors should look for when evaluating potential tech investments:

1. Product Innovation
2. Total Addressable Market (TAM)
3. Customer-Centricity
4. Good Management

Let's explore each of these drivers in detail.

1. Product Innovation

Product innovation is perhaps the most straightforward driver to understand and identify. As an investor in tech stocks, you likely already use many of the products and services offered by these companies, giving you firsthand experience of their innovations.

Examples of notable product innovations include:

• The annual release of new, improved iPhones by Apple
• The launch of the Amazon Kindle

The benefits of these innovations are clear to consumers, and they often generate new revenue streams or enhance existing ones. Companies that demonstrate a track record of product innovation are likely to continue producing innovative products, making them attractive investment opportunities.

2. Total Addressable Market (TAM)

The Total Addressable Market (TAM) refers to the potential market size for a company's products or services. A large TAM provides greater opportunities for premium revenue growth and allows companies to achieve significant scale, which often leads to competitive advantages.

Netflix once again serves as an excellent example of a company that successfully expanded its TAM:

1. It started as a DVD rental service.
2. Introduced streaming, which was both an innovative product and a way to increase its TAM.
3. Expanded internationally, further increasing its potential market.
4. Continues to benefit from the global rise of smartphones, as more people use their mobile devices as their primary screens.

When evaluating a company's TAM, look for signs of international presence and potential for further expansion. Companies with a significant global footprint, like Google, often stand out as strong investment prospects.

3. Customer-Centricity

Companies that prioritize customer satisfaction over short-term investor expectations tend to be more successful in the long run. This customer-centric approach often leads to better products, stronger brand loyalty, and ultimately, better financial performance.

Mahaney uses the example of Amazon versus eBay to illustrate this point:

• eBay was once the leader in online retail but focused more on short-term profits.
• Amazon, on the other hand, was willing to sacrifice short-term profits to benefit customers, such as with the launch of Amazon Prime in 2005.
• This customer-centric approach helped Amazon overtake eBay and become the dominant force in online retail, as well as a superior investment opportunity.

When evaluating tech stocks, look for companies that consistently prioritize customer satisfaction and are willing to invest in long-term customer relationships, even at the expense of short-term profits.

4. Good Management

The quality of a company's management team is crucial to its success and, by extension, its stock performance. Mahaney suggests several characteristics to look for in a strong management team:

• Founder-led companies often perform well
• Tech backgrounds for leaders in tech companies
• Successful track record
• Long-term focus
• Talent for product innovation
• Obsession with customer satisfaction

Amazon once again serves as a prime example of a company with excellent management, ticking all these boxes.

Interestingly, Mahaney also notes a correlation between CEO attendance at the Burning Man festival and tech company excellence. While this may seem like a quirky observation, it highlights the importance of looking beyond traditional metrics when evaluating management quality.

The Logic of Stock Valuation

While understanding the key drivers of revenue growth is crucial, Mahaney also emphasizes the importance of applying logic when evaluating stock valuations. He cautions against relying too heavily on precise valuation frameworks, as these attempts to predict the future can often be inaccurate due to unforeseen circumstances.

The Limitations of Valuation Frameworks

Mahaney uses several examples to illustrate the limitations of traditional valuation methods:

1. COVID-19 Impact: Many discounted cash flow valuations from January 2020 became inaccurate just a month later when the pandemic began to affect the global economy.

2. Uber's Turnaround: Despite suffering an $8.6 billion net loss in 2019, Uber's share price skyrocketed 300 percent in the following year, defying many analysts' expectations.

These examples show that many tech stock valuations can be seen as "fantasy valuations" due to the high level of uncertainty in the tech sector.

Applying Logic to Valuations

Rather than relying on precise mathematical models, Mahaney suggests applying logic when assessing stock valuations. He recommends asking the following questions:

1. For high-earnings companies: Is the growth sustainable?
2. For companies with minimal earnings: Is there evidence that the situation will improve in the long run?

He also notes that even companies with very high price-to-earnings multiples, like Amazon and Netflix, can turn out to be good investments.

When evaluating unprofitable companies, Mahaney suggests looking for similar business models that are profitable and assessing the overall potential for profitability based on current knowledge.

By applying these logic-based tests, investors can make more informed decisions about stock valuations, even in the face of uncertainty.

Practical Advice for Tech Stock Investors

As we near the end of our summary, let's review some practical advice Mahaney offers for tech stock investors:

1. Don't Be Deterred by Expensive-Looking Stocks

High-growth tech stocks often appear expensive based on traditional valuation metrics. However, Mahaney advises not to be scared off by these seemingly high valuations. Over time, high growth rates can transform an initially expensive stock into a reasonable investment.

2. Remain Optimistic About Tech Stocks

Despite his long career analyzing tech stocks, Mahaney remains excited about the growth opportunities in the internet sector. This optimism is based on his extensive experience and the continued innovation in the tech industry.

3. Avoid Day Trading and Meme Stocks

For new investors, Mahaney strongly advises against day trading and investing in meme stocks (stocks that gain popularity through social media hype rather than fundamental value). While these can be exciting and potentially profitable in the short term, they carry significant risks and are more akin to gambling than investing.

He uses the example of GameStop's dramatic price fluctuations in January 2021 to illustrate the volatility and risk associated with meme stocks and day trading.

4. Do Your Research

Before investing in any tech company, Mahaney emphasizes the importance of thorough research. Assess the company carefully using the criteria discussed earlier:

• Consistent revenue growth of 20% or more
• Product innovation
• Large total addressable market
• Customer-centric approach
• Excellent management

5. Stay Humble

Even with careful research and analysis, investors will sometimes make mistakes. Mahaney shares that his own errors have taught him the importance of humility in investing. He recommends maintaining this humble attitude to all investors.

Final Thoughts

Investing in tech stocks can be a rewarding experience, both financially and intellectually. By following Mahaney's advice and focusing on high-quality companies with strong fundamentals, investors can increase their chances of success in this dynamic sector.

Key takeaways from "Nothing But Net" include:

1. Focus on long-term investing rather than short-term trading.
2. Look for companies with consistent revenue growth of at least 20%.
3. Evaluate potential investments based on product innovation, total addressable market, customer-centricity, and management quality.
4. Apply logic when assessing stock valuations, rather than relying solely on mathematical models.
5. Don't be deterred by seemingly expensive stocks if they show strong growth potential.
6. Avoid the temptation of day trading and meme stocks.
7. Always do thorough research before investing.
8. Stay humble and be prepared for occasional setbacks.

By keeping these principles in mind, investors can navigate the exciting world of tech stocks with greater confidence and potential for success. Remember that while there are no guarantees in the stock market, a well-informed, long-term approach to investing in high-quality tech companies can lead to significant returns over time.

As you embark on your tech stock investment journey, keep in mind that the technology sector is constantly evolving. Stay informed about industry trends, new innovations, and potential disruptors. Be open to learning and adapting your investment strategy as the landscape changes.

Mahaney's insights, drawn from his extensive experience in analyzing tech stocks, provide a valuable framework for both novice and experienced investors. By combining his practical advice with your own research and judgment, you can develop a robust approach to tech stock investing that aligns with your financial goals and risk tolerance.

Remember that investing in tech stocks is not just about potential financial gains. It's also an opportunity to be part of the exciting technological advancements that are shaping our world. As you invest in these companies, you're not just buying shares – you're supporting innovation and progress.

Lastly, while this book summary provides a comprehensive overview of Mahaney's key ideas, it's always beneficial to read the full book for more detailed insights, examples, and nuances. "Nothing But Net" offers a wealth of knowledge that can help you refine your investment strategy and gain a deeper understanding of the tech stock market.

Happy investing, and may your tech stock portfolio be filled with nothing but net gains!