Which Tech Companies would you buy?

[LC]

So Tech has seen a major runup this year. There was a recent thread of why Berkshire does not buy tech (ex-Apple, I presume, which maybe is better defined as a consumer discretionary at this point)

 

Generally this community is tech-averse. And why? Because Buffett said so? Because it's difficult to forecast out these companies? The companies I do see discussed are maybe the highest capex ones (semiconductor manufacturers). Certainly this group is smart enough that, at the very least, it should not stop us from trying. 

 

Particularly when the opportunity is so immense:

A year ago I was debating buying Adobe (I sold options instead). The 85% YTD gain there dwarfs Fairfax's 50+% gain, and Adobe is a relatively large, stable, and well-understood company. And this is in a macro scenario heavily favored to Fairfax (rising interest rates).

 

And META was a huge miss on my part (well done, Sanjeev & others)

 

So I guess two questions to ponder as we head into the new years:

1- What is stopping you from researching and forming a real investment opinion on technology companies? Where would you start?

2- And to make it a bit more specific, of all the Technology companies you are aware of, which do you think are the "best bets", if you had to choose?

 

Personally I think something like Nvidia is a bit on the overvalued side, and MSFT, GOOG are so large already, it is difficult to see such high growth rates continuing over a long-term horizon. Adobe I like, but the recent run-up is hefty. And I don't know how AI will impact that ecosystem. Although I can see how given their existing customer base and distribution, plugging AI into the product mix would be a net benefit.

 

Food for thought (as if we need any more food...)

[james22]

I'm 20% Vanguard's Tech fund (VITAX).

 

Because I don't know any better.

[changegonnacome]

Yeah I think the Buffet argument is that tech is so subject to disruption it fails the Berkshire test....which is high certainty forecastable into the future market position and by extension cash flows - coke etc. Buffet is always looking for things that WONT change such that compounding is uninterrupted....and tech feels to him like it's built on shifting sands.

 

What likely has changed in reality, for some of the tech giants today-  specifically the platform/ecosystem guys (M7) and I think only anti-trust stops it.....is that certain companies have so expertly positioned themselves in their markets that while disruption remains a risk of course......they posses such a dominant market position/moat/platform/scale that innovations from left field competitors can be assimilated and disseminated so that new disruptive competitors are quickly turned into concubines e.g. OpenAI.

 

In some sense - some of these companies are now the doorway through which step changes in innovation can only occur and they are acting like a toll road on that future innovation - Microsoft, Apple & Google - feel to me the most like this but any of the M7 I'm sure can make that case.

 

They are no longer subject to disruption - they are now the rails on which next generation disruption takes place.

 

[Sweet]

20 hours ago, james22 said:

I'm 20% Vanguard's Tech fund (VITAX).

 

Because I don't know any better.

Unfortunately - this

 

I think the tech companies with really long runways aren’t Apple, Google, Meta etc. and it’s just about impossible to predict the next ones.

 

 

[backtothebeach]

2 hours ago, Sweet said:

Unfortunately - this

 

I think the tech companies with really long runways aren’t Apple, Google, Meta etc. and it’s just about impossible to predict the next ones.

 

VITAX is 40% Apple and Microsoft.

[Sweet]

10 minutes ago, backtothebeach said:

 

VITAX is 40% Apple and Microsoft.

Yes and it’s a huge problem.  But if there is another way to get exposure without them in it I’m all ears.

[james22]

1 hour ago, Sweet said:

Yes and it’s a huge problem.

 

I'm actually OK with the weighting, thinking their wealth will likely buy innovation.

 

I would rather the 40% included Google, Meta, and Amazon. 

 

But Large Growth (VIGAX) which does, excludes the small tech companies and hoped for "Dell Effect."

[Munger_Disciple]

I find tech investing incredibly hard. For me the hardest part is predicting what can happen in 5-10 year time frame. Businesses like AAPL, GOOG or MSFT which people think they can predict the business reasonably well are all trading at pretty high valuations. With the high valuation comes the risk that business won't pan out as predicted. And it is almost impossible to predict which new comer will be the next META or GOOG. 

 

A side question: Is it even possible to out-perform or even match overall market long term without direct exposure to tech?

[Spooky]

S&P 500

[Munger_Disciple]

4 minutes ago, Spooky said:

S&P 500

 

Even at 24X multiple? That's the question. 

[brobro777]

2 hours ago, Munger_Disciple said:

 

Even at 24X multiple? That's the question. 

not only that but risk free rates (short term, long term) substantially higher than during the last 15 years, plus these techs already do big they’re $3tril? 
 

that’s too much baby, too much

[Munger_Disciple]

26 minutes ago, brobro777 said:

not only that but risk free rates (short term, long term) substantially higher than during the last 15 years, plus these techs already do big they’re $3tril? 
 

that’s too much baby, too much

Yes!  The higher return on bonds compared to just 2 years ago makes the index that much more expensive. You can get 4.5% on 10-year treasury bonds and probably 6% on high quality corporate bonds. So S&P 500 index earning 4% in comparison looks like a pretty bad bet. You would think that stocks should trade with an equity risk premium of at least 2-3% over 10-year treasury bonds. 

Edited November 26, 2023 by Munger_Disciple

[brobro777]

13 minutes ago, Munger_Disciple said:

Yes!  The higher return on bonds compared to just 2 years ago makes the index that much more expensive. You can get 4.5% on 10-year treasury bonds and probably 6% on high quality corporate bonds. So S&P 500 index earning 4% in comparison looks like a pretty bad bet. You would think that stocks should trade with an equity risk premium of at least 2-3% over 10-year treasury bonds. 

I wish it was 2015 again with interest rates at 0.25% with 10 year below 2%. Life would be so much easier 

 

haha

 

 

[james22]

3 hours ago, Spooky said:

S&P 500

 

That's the thing.

 

If you aren't at 28% Tech like the market, you are really making a bet against it. 

[formthirteen]

The tollbooths:

FICO, VRSN, LSEG, ENX.PA, OTCM, SSNC, etc.

 

Small:

ANSS, SLP

 

Bigger:

ANET, NET, DPZ

 

The bigliest:

META

 

 

Edited November 26, 2023 by formthirteen

[Whensthepaintdry?]

Adsk is one that has always sounded promising. 

[UK]

On 11/24/2023 at 7:02 PM, LC said:

So I guess two questions to ponder as we head into the new years:

1- What is stopping you from researching and forming a real investment opinion on technology companies? Where would you start?

2- And to make it a bit more specific, of all the Technology companies you are aware of, which do you think are the "best bets", if you had to choose?

 

Re 1: I think there is so much information on tech companies that it is almost to much:). Like from daily news to books dedicated to a particular company. For me the best sources were: a. books: e.g. Jobs biography / Apple, In the Plex / Google, Everything Store / Amazon etc. Not that I get any clear answers from them, on the contrary, my main take away was maybe how hard it is to predict the future and how astonishingly accidental sometimes success could be. Like when Jobs saw the idea of the graphical OS interface (invented at Xerox PARC and he did knew what to do with it, and so Apple made it into the life, but than only Gates ans Microsoft made a real money (and monopoly) from it, also by copying the idea, but additionally by opening it to others (contrary to Apple's closed system). So a lot of stories like this, really good for not to have a too firm opinion on ones ability to know all the answers etc b. I really like to hear or read what other investors I respect has to say or write about tech companies they own. c. and then there is some quite quality sources, like stratechery.com, which I like to read.

 

Re 2: So I did not really invested much into tech before last year (except the mistakes of following Buffett into IBM in 2012 and later trying luck with China's big tech in 2021), and it was quite a headwind not to own them like from 2015 to 2021, to say the least:), but last year I just thought it was irresistible not to buy some of these big tech companies and I ended the year with like 4 of them (and 3 in a major way) and some leverage to do this. After all reading and thinking, I came to the conclusion (and generally still think the same) that  the best way for me is to go only with these really big leading tech companies which are understandable and investable for me enough not to be afraid to buy or to hold while they are not so popular, because all other/smaller/challengers or all these tech companies without profits etc are just too hard for me. This kind of rationale also really stuck with me: https://stratechery.com/2020/the-end-of-the-beginning/. So basically a universe of AAPL, MSFT, GOOG, META, AMZN, all from Magnificent 7 or 8, except for the TSLA, NFLX, NVDA. And maybe also Tencent and TSM, if I was not afraid of geopolitical and China risks (maybe someday). So any of these big 5 or 7 I am prepared to buy and own, depending on the valuation and situation, but currently I own only META (~60 per cent of original stake) and some AAPL indirectly via BRK.

 

Also, I am not sure if payment companies qualifies as tech in your question, but currently some of these (e.g. PYPL or STNE) looks really attractive for me, but so far I do not have enough conviction to make them into a large positions (I am not comfortable with the risk, that Google, Apple or some other big whale could eat them alive:)).

 

Edited November 26, 2023 by UK

[james22]

21 minutes ago, UK said:

Like when Jobs saw the idea of the graphical OS interface (invented at Xerox PARC, but they did knew what to do with it), and so he made it into the life, but than only Gates made a real money (and monopoly) from it, also by copying the idea, but additionally by opening it to others (contrary to Apple's closed system). 

 

Great example.

[UK]

37 minutes ago, james22 said:

 

Great example.

 

And the story of how Xerox and it's PARC became so powerful and later failed is no less interesting: 

 

https://www.gatesnotes.com/Business-Adventures-Free-Chapter-Download

 

https://www.gatesnotes.com/Business-Adventures

 

One of Brooks’s most instructive stories is “Xerox Xerox Xerox Xerox.” (The headline alone belongs in the Journalism Hall of Fame.) The example of Xerox is one that everyone in the tech industry should study. Starting in the early ’70s, the company funded a huge amount of R&D that wasn’t directly related to copiers, including research that led to Ethernet networks and the first graphical user interface (the look you know today as Windows or OS X). But because Xerox executives didn’t think these ideas fit their core business, they chose not to turn them into marketable products. Others stepped in and went to market with products based on the research that Xerox had done. Both Apple and Microsoft, for example, drew on Xerox’s work on graphical user interfaces. I know I’m not alone in seeing this decision as a mistake on Xerox’s part. I was certainly determined to avoid it at Microsoft. I pushed hard to make sure that we kept thinking big about the opportunities created by our research in areas like computer vision and speech recognition. Many other journalists have written about Xerox, but Brooks’s article tells an important part of the company’s early story. He shows how it was built on original, outside-the-box thinking, which makes it all the more surprising that as Xerox matured, it would miss out on unconventional ideas developed by its own researchers.

 

And then: https://youtu.be/_15DReQKbt8?si=Vc2bdixPvdhMnH75

 

There’s no doubt that the antitrust lawsuit was bad for Microsoft. We would have been more focused on creating the phone operating system so that instead of using Android today, you would be using Windows Mobile. If it hadn’t been for the antitrust case, Microsoft would have…

 

You’re convinced?

 

Oh we were so close. I was just too distracted. I screwed that up because of the distraction. We were just three months too late with a release that Motorola would have used on a phone, so yes, it’s a winner-take-all game, that is for sure. Now nobody here has ever heard of Windows Mobile, but oh well. That’s a few hundred billion here or there.

 

Edited November 26, 2023 by UK

[james22]

34 minutes ago, UK said:

Starting in the early ’70s, the company funded a huge amount of R&D that wasn’t directly related to copiers, including research that led to Ethernet networks and the first graphical user interface (the look you know today as Windows or OS X). But because Xerox executives didn’t think these ideas fit their core business, they chose not to turn them into marketable products.

 

The best argument for the Magnificent Seven's continued dominance is their familiarity with stories like this.

 

Everyone's read The Innovator's Dilemma, etc.

[mattee2264]

It is tough really. Most value investing theory is based on reversion to the mean. As Graham loved to quote ""Many shall be restored that are now fallen, and many shall fall that are now in honour". There are also a lot of outdated academic studies showing that buying glamour stocks is a losing proposition so there is a natural reaction to shun popular stocks that everyone seems to own. But with more and more of consumer and business wallet share going towards e-commerce/digital advertising/cloud/AI those are tailwinds that are very favourable for Big Tech and very unfavourable for everyone else. And therefore anyone without at least a market weight in Big Tech risks getting left behind. Especially if AI lives up to the hype and extends their growth runway another decade. 

 

Valuation risk is clearly higher than previous years. You are paying about double the market multiple. On the other hand mega caps traded at much higher multiples at the heydays of the Nifty Fifty and dot com bubbles. 

 

Competitive risk is possibly lower than previous episodes because most of them have incredibly strong moats and each technological advance seems to reinforce them with AI likely to be no different at least in terms of its current limited possible applications. Tesla and Nvidia have technological leads which historically are difficult to maintain but in the meantime they can build their mind share so even when viable alternatives arrive people may still go with Tesla and Nvidia. Probably the greatest competitive risk is that as their markets overlap more and more competition between themselves intensifies driving down margins and returns. But historically with new technologies especially those that can capture the imagination the way AI can then there is a risk of new competition from upstarts who have little trouble attracting money from venture capitalists and the speculative public. And long dominance and technological leadership didn't save IBM, Intel or Polaroid from being disrupted by emergent technologies. 

 

Execution risk is there especially with AI requiring huge investments with uncertain returns. But in general their core businesses are well managed. 

 

Cyclical risk is probably underestimated. They haven't been tested by a proper recession. The COVID episode was brief and it soon became clear they were major beneficiaries. But historically advertising, semiconductors, consumer goods, cars, even IT have not been immune to the economic cycle. And until AI hype took over investors were most unkind to the contrast between 2021 and 2022 results the latter weighed down by inflation and a slowing economy. But so long as the US government continues to spend trillions and companies are reluctant to fire staff the US can probably avoid a severe recession. And bizarrely if economic growth did strengthen and was accompanied by higher interest rates it might encourage a rotation out of tech and into more cyclical/value names. So to some extent Big Tech do rely on a goldilocks not too hot not too cold economy. They did badly in the fire stage and might do equally badly in the ice stage. 

 

Regulatory risk is hard to call. Regulation has been pretty soft and done little to prevent acquisitions that have enhanced tech dominance. But it is not unforeseeable that regulators would want to put roadblocks in the way of AI advancements. 

 

Geopolitical risks might also exist if they make it difficult for global domination to persist and makes it more difficult for them to operate in certain markets. 

 

And probably some other risks that haven't occurred to me.

 

 

 

 

 

 

[ValueArb]

6 hours ago, UK said:

 

And the story of how Xerox and it's PARC became so powerful and later failed is no less interesting: 

 

https://www.gatesnotes.com/Business-Adventures-Free-Chapter-Download

 

https://www.gatesnotes.com/Business-Adventures

 

One of Brooks’s most instructive stories is “Xerox Xerox Xerox Xerox.” (The headline alone belongs in the Journalism Hall of Fame.) The example of Xerox is one that everyone in the tech industry should study. Starting in the early ’70s, the company funded a huge amount of R&D that wasn’t directly related to copiers, including research that led to Ethernet networks and the first graphical user interface (the look you know today as Windows or OS X). But because Xerox executives didn’t think these ideas fit their core business, they chose not to turn them into marketable products. Others stepped in and went to market with products based on the research that Xerox had done. Both Apple and Microsoft, for example, drew on Xerox’s work on graphical user interfaces. I know I’m not alone in seeing this decision as a mistake on Xerox’s part. I was certainly determined to avoid it at Microsoft. I pushed hard to make sure that we kept thinking big about the opportunities created by our research in areas like computer vision and speech recognition. Many other journalists have written about Xerox, but Brooks’s article tells an important part of the company’s early story. He shows how it was built on original, outside-the-box thinking, which makes it all the more surprising that as Xerox matured, it would miss out on unconventional ideas developed by its own researchers.

 

This is mostly a myth. Xerox did try to go to market with the Xerox Star, but it was way too expensive at $16,000 for a work-station let alone tens of thousands more for servers and printers. It was in many ways too complex and in other ways incomplete (still relied on command driven terminal for a lot of functions).

 

Apple tried something similar with a more mainstream processor to make the Lisa for about half the price, but failed utterly too for many of the same reasons. It wasn't until Jobs got booted off the Lisa project and raised the pirate flag commandeering the Macintosh project from Jeff Raskin that a reasonable cost graphical computer was created. The team compressed the GUI into 64k of ROM,  able to run applications in 128k of RAM, fit on a 9 inch screen and use a $5 mouse that Jobs helped design, all which enabled Apple to release a useful $2,500 graphical computer with a full graphical user interface, no more command line, GUI applications for everything.

 

6 hours ago, UK said:

 

And then: https://youtu.be/_15DReQKbt8?si=Vc2bdixPvdhMnH75

 

There’s no doubt that the antitrust lawsuit was bad for Microsoft. We would have been more focused on creating the phone operating system so that instead of using Android today, you would be using Windows Mobile. If it hadn’t been for the antitrust case, Microsoft would have…

 

You’re convinced?

 

Oh we were so close. I was just too distracted. I screwed that up because of the distraction. We were just three months too late with a release that Motorola would have used on a phone, so yes, it’s a winner-take-all game, that is for sure. Now nobody here has ever heard of Windows Mobile, but oh well. That’s a few hundred billion here or there.

 

 

Microsoft released Windows mobile devices in the mid-90s, more than a decade before the iPhone started development. They had phones nearly 5 years before the iPhone was released. When the iPhone was released, Balmer famously laughed at it and took it years to pivot to build something similar with Windows 7 and Windows 8. It wasn't Antitrust, Microsoft (Balmer) fumbled this from the beginning, all their mobile devices and phones were terrible.

Edited November 26, 2023 by ValueArb

[UK]

7 minutes ago, ValueArb said:

 

This is mostly a myth. Xerox did try to go to market with the Xerox Star, but it was way too expensive at $16,000 for a work-station let alone tens of thousands more for servers and printers. It was in many ways too complex and in other ways incomplete (still relied on command driven terminal for a lot of functions).

 

Apple tried something similar with a more mainstream processor to make the Lisa for about half the price, but failed utterly too for many of the same reasons. It wasn't until Jobs got booted off the Lisa project and raised the pirate flag commandeering the Macintosh project from Jeff Raskin that a reasonable cost graphical computer was created. The team compressed the GUI into 64k of ROM,  able to run applications in 128k of RAM, fit on a 9 inch screen and use a $5 mouse that Jobs helped design, all which enabled Apple to release a useful $2,500 graphical computer with a full graphical user interface, no more command line, GUI applications for everything.

 

 

Microsoft released Windows mobile devices in the mid-90s, more than a decade before the iPhone started development. They had phones nearly 5 years before the iPhone was released. When the iPhone was released, Balmer famously laughed at it and took it years to pivot to build something similar with Windows 7 and Windows 8. It wasn't Antitrust, Microsoft (Balmer) fumbled this from the beginning, all their mobile devices and phones were terrible.

 

Thanks. Well, if main participants of events do not know what are they even talking about, everything looks even more accidental and confusing to me:)

 

But his is the source of a full version of the story on mobile OS, from which I copied only a few funny lines: https://stratechery.com/2023/attenuating-innovation-ai/

 

'This opinion is, to use a technical term favored by analysts, bullshit. Windows Mobile wasn’t three months late relative to Android; Windows Mobile launched as the Pocket PC 2000 operating system in, you guessed it, 2000, a full eight years before the first Android device hit the market.'

 

But my whole point was, that for whatever reasons, Microsoft missed it and it is kind of scary how accidental some important developments in tech are.

[Munger_Disciple]

In addition to high valuations, the other issues with the mega tech companies are: excessive stock based comp (with evergreen option grants and repricing of grants to the entire work force), bloated work force with very high pay, poor allocation of capital (Google's Other Bets, Zuckerberg's Metaverse, etc.) and generally shareholder unfriendly governance & policies with one noteworthy exception being Apple.

The other issue is that some point their growth has to slow; they are already massive companies trading at quite generous multiples. When the growth does slow, I think there will be a bloodbath as valuations will get reset. I mean Google & Meta already pretty much hoover up all the advertising dollars and at some point they can only grow GDP + may be a percent or two. 

Edited November 26, 2023 by Munger_Disciple

[Munger_Disciple]

Apple is by far the best managed of the magnificent seven. I have heard from s/w engineer friends of mine that Apple doesn't grant stock options/ restricted stock grants to everyone, only to star performers. They tell me Google & Meta are very (excessively from a shareholder point of view) generous and there is a lot of fat at both these companies. I watched a video discussion with Apple CFO Luca Maestri & I can tell he went to Buffett school of frugality & management. Perhaps the best CFO in the world. And Tim Cook is a great CEO. I can see (belatedly to my detriment) why Buffett loves Apple and will most likely not sell ever even if forward returns may not be that good (kind of like Coke in late 90s) because Berkshire is sitting on a massive unrealized gain, loves the management & shareholder friendly capital allocation policies. 

Edited November 26, 2023 by Munger_Disciple