How do you get in early on the next Google, Amazon, or Netflix?
It’s an imprecise art, and RBC Capital Markets senior tech analyst Mark Mahaney would know. The well-known market watcher has made both the right calls, and the completely wrong ones since he first started following the Internet industry nearly 20 years ago.
Case and point: He told investors to sell Amazon in 2003. Now, its founder, Jeff Bezos, is the world’s richest man thanks to the e-commerce titan’s success. Later, he told clients to snap up Priceline just before it tripled in 2008.
But Mahaney says he has seen some trends in his two decades on the job that may forewarn a stock’s rise or fall, as he spelled out at Fortune’s Brainstorm Tech conference in Aspen, Colo. on Tuesday.
His lessons come at a time when investors have reason to rebalance their portfolios. Tech stocks have continued to outperform the wider market.
While the S&P 500 has gained roughly 15% in the last half year, the S&P Information Technology Index has gained 31%, fanning worries that investors are too optimistic about current technologies and their ability to transform the world. Tech bears have also pointed the widening gap between the price to earnings ratio of tech stocks—an important measure of whether they’re overpriced—and that of non-tech companies.
Here are four signals of a potentially troubled tech company—and one interesting reason to consider buying, according to Mahaney’s “10 Lessons, 10 Minutes: The Perils of Stock Picking in Tech” presentation.
Sell
In tech investing, the winnings can be stratospheric. They can also be nonexistent.
Mahaney pointed out four signs that a company is in an unhealthy place: If it makes an unsuitable acquisition, such as eBay’s acquisition of Skype in 2005.
Secondly, if the company experiences a sharp drop off in growth, such as online retailer Zulily following its IPO in 2013. While the company posted revenue growth of 132% in 2012, that fell to 46% by 2015.
Third: If the company comes with an overactive revolving door, such as online music radio Pandora, which has had three different CEOs since the start of 2016.
And finally: if it buys stadium naming rights such as CMGI, the tech company behind the now defunct search engine Alta Vista. CMGI and other tech companies hit hard by the dot-com bubble had their names removed from pro sports stadiums when they weren’t able to pay on their sponsorship agreements.
Buy
“Look for the lucky lexicon,” said Mahaney, pointing to tech company names that have wormed their way into daily vernacular. Think Google, Snap, and “Netflix and chill.”
When a company’s name begins to pop up left and right, “it’s a really good time to invest in the stock,” he says. That’s because not only are consumers using the product often, he also think the company in mind can dramatically shrink its advertising and marketing costs.
