Which Tech Companies would you buy?

[james22]

16 minutes ago, Munger_Disciple said:

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.

 

So lots up upside with better management then?

[Munger_Disciple]

10 minutes ago, james22 said:

 

So lots up upside with better management then?

 

I pointed out earlier that governance is a major issue. Basically shareholders have zero say in how Google & Meta operate. The founders have super voting shares. 

[Saluki]

I think the market has rightly rewarded the tech companies that have some kind of moat.  Snapchat is unprofitable and trades at 4x sales, while META is wildly profitable even after wasting tens of billions on Zuck's metaverse cartoon obsession, and META trades at 7x sales. Why?  I don't use Snapchat, and while the millennials do, if something better came along (TikTok?) they wouldn't hesitate to stop using it. 

 

A good test for a moat is something that I heard Seth Godin mention: Would you miss it, if it were gone? 

 

If I woke up and Snapchat didn't exist, I wouldn't notice, but if META didn't exist, I would notice.  Facebook, WhatsApp and Instagram are used by different people, but they tend to use them several times a day. 

 

Google?  I would cry if Google was gone and I had to use Bing everyday. If YouTube disappeared and I had to use Vimeo, I wouldn't.  There aren't enough people posting videos on there so I won't find what I'm looking for. 

 

MSFT?  Your office runs on MSFT, you couldn't work without it.  AMZN?  The cloud stuff is invisible to me, but I do order on Amazon almost every week, and I go to WholeFoods even thought it's not the closest supermarket to me. 

 

So, I'm sure you can make a case for Nvidia or some other AI darling, but if you run it through the mental model of "would I miss it if it were gone?" then it cuts out a lot of the contenders. I'm sure Nvidia works great for AI or Crytpo, but as a person typing a search or using a service, how would I know what chips are on the backend? If someone else came along and started making chips "with more megaflops or less megaflops" then they could take market share and no one would notice besides the shareholders.

[Spekulatius]

Well if someone would replace google search with something better on your iphone - would you miss it? maybe. Same with google maps - Apple maps has improved to the point where it is almost as good.

 

So most tech moats don't have the longevity that people think they have. the above isn't a theoretical exercise either since google pays Apple dearly to be the default search engine and Apple maps already exists. So Apple could very well change their mind and attack the moat with their own search or replace with Google (AI enhanced) search for example.

 

I don't think the tech moats have the longevity that people think they have. Lot's of tech moats have disintegrated lately -Paypal, Intel, Cisco are fairly recent examples. I believe with tech it's much more about having great and forward looking management in place then the tech moat itself. When you look at history, each tech moat is probably seriously challenged every 10 years or so and it depends on management if they keep the moat intact or even develop new moaty business or not.

[Sweet]

Agree with Spec on this one.  If someone produces a better search engine than Google, or even one just as good, I’d use it.

[UK]

https://omny.fm/shows/masters-in-business/masters-in-business-brad-gerstner-podcast

[Luca]

IMO the earnings multiples are overstating how much cashflow investors are actually buying. Alphabet pays 20b a year to employees in shares, 20b of EPS power that gets lost every year. The company can be bought for 1.6T, highest earnings have been 76b in 2021. Deduct your 20b in SBC and deduct maintenance capex of some 10-15b, there is maybe 40b FCF coming in every year right now. Thats a 2.5% yield yearly.

 

YoY growth this year has been what, 5%? Earnings have come down also so the real FCF yield is probably 2%. 

 

To make this work out you have to assume SO much, stable 50x cashflow multiple, continued revenue growth of 15%+, great capital allocation, no attack on moat etc

 

There is no margin of safety anymore and the chance to get burned very high. Maybe one can make the stretch and say the 40b going into RnD could be sent to shareholders etc but who can really say or know that? And who wants to bet on that?

[Luca]

I mean this is still probably better than 4% 10 year treasury and better than keeping cash but if you are smart enough to buy alphabet, you should be smart enough to understand that berkshire, fairfax, exor etc are much better buys and then skip alphabet in the first place IMO. I bought some alphabet when it was around 100 USD and sold after the chat gpt drama for little gain, i wouldnt buy it now. 

Edited December 1, 2023 by Luca

[Dinar]

1 hour ago, Luca said:

IMO the earnings multiples are overstating how much cashflow investors are actually buying. Alphabet pays 20b a year to employees in shares, 20b of EPS power that gets lost every year. The company can be bought for 1.6T, highest earnings have been 76b in 2021. Deduct your 20b in SBC and deduct maintenance capex of some 10-15b, there is maybe 40b FCF coming in every year right now. Thats a 2.5% yield yearly.

 

YoY growth this year has been what, 5%? Earnings have come down also so the real FCF yield is probably 2%. 

 

To make this work out you have to assume SO much, stable 50x cashflow multiple, continued revenue growth of 15%+, great capital allocation, no attack on moat etc

 

There is no margin of safety anymore and the chance to get burned very high. Maybe one can make the stretch and say the 40b going into RnD could be sent to shareholders etc but who can really say or know that? And who wants to bet on that?

There is a mistake in your analysis.  Some stock compensation expense actually is reflected in net income and EPS.  Not all, but quite a bit of it.  

[Luca]

4 minutes ago, Dinar said:

There is a mistake in your analysis.  Some stock compensation expense actually is reflected in net income and EPS.  Not all, but quite a bit of it.  

Do you know how much? Yeah, it has to be deducted at FCF but is included in net income by how much? 

[LC]

39 minutes ago, Luca said:

Do you know how much? Yeah, it has to be deducted at FCF but is included in net income by how much? 

Should be the amount added back in the cash flow statement?

[KCLarkin]

56 minutes ago, Dinar said:

There is a mistake in your analysis.  Some stock compensation expense actually is reflected in net income and EPS.  Not all, but quite a bit of it.  

There are two mistakes. Net income is after both SBC and maintenance capex. So you have a 4-5% Earnings Yield, cash on the balance sheet, growing mid-teens. With plenty of opportunities to run more efficiently.

 

It is true that "real FCF" is less than Net Income. But that should be the case when you are reinvesting for growth. If growth slows, they should get close to 100% "real FCF" conversion so you don't need to assume a constant "real FCF" multiple as long at P/E doesn't compress too much.

[Luca]

3 hours ago, KCLarkin said:

There are two mistakes. Net income is after both SBC and maintenance capex. So you have a 4-5% Earnings Yield, cash on the balance sheet, growing mid-teens. With plenty of opportunities to run more efficiently.

 

It is true that "real FCF" is less than Net Income. But that should be the case when you are reinvesting for growth. If growth slows, they should get close to 100% "real FCF" conversion so you don't need to assume a constant "real FCF" multiple as long at P/E doesn't compress too much.

Thanks @KCLarkin. In that case it does look more attractive, still not cheap but arguably better than bonds and probably the Index too. 

[Dinar]

4 hours ago, Luca said:

Do you know how much? Yeah, it has to be deducted at FCF but is included in net income by how much? 

You can figure out the difference between how much the company reported and how much it actually cost the company via the tax footnote.  

[Dinar]

3 hours ago, KCLarkin said:

There are two mistakes. Net income is after both SBC and maintenance capex. So you have a 4-5% Earnings Yield, cash on the balance sheet, growing mid-teens. With plenty of opportunities to run more efficiently.

 

It is true that "real FCF" is less than Net Income. But that should be the case when you are reinvesting for growth. If growth slows, they should get close to 100% "real FCF" conversion so you don't need to assume a constant "real FCF" multiple as long at P/E doesn't compress too much.

Net income is NOT after maintenance cap ex.  It is after depreciation, which is almost never = to maintenance cap ex. 

[Luca]

18 minutes ago, Dinar said:

Net income is NOT after maintenance cap ex.  It is after depreciation, which is almost never = to maintenance cap ex. 

Especially with the years of inflation we had

[ValueArb]

6 hours ago, KCLarkin said:

There are two mistakes. Net income is after both SBC and maintenance capex. So you have a 4-5% Earnings Yield, cash on the balance sheet, growing mid-teens. With plenty of opportunities to run more efficiently.

 

It is true that "real FCF" is less than Net Income. But that should be the case when you are reinvesting for growth. If growth slows, they should get close to 100% "real FCF" conversion so you don't need to assume a constant "real FCF" multiple as long at P/E doesn't compress too much.

 

Is it still growing mid-teens? 2022 revenues only grew 10% over 2021, and 2023 revenues are only up 7% over same periods in 2022. Operating profits have been flat from 2021 to TTM 2023. This is what makes GOOG hard for me, I don't know any easy way of filtering out COVID effects. 2020 +13%, 2021 +41%, then it's been slow ever since. GOOG crushed 2010 decade averaging 21% revenue growth but growing $300B in revenues is way harder than growing $30B. 

 

The way I try to estimate to growth cap-ex is extremely simplistic, and probably wrong. I take the revenue growth and assume the percentage of cap-ex used for growth cap-ex is the same as the percentage of new revenue. So in 2022 I use roughly 10% for growth cap-ex and the remaining 90% for maintenance cap-ex. So my owner earnings for 2022 is $60B net income + $16B depreciation - $28B cap-ex = $48B in real free cash flow. Trailing 12 months works out to $55B in RFCF, a 3.5% yield on enterprise value or 3.3% on market cap. To get 4.5% yield on EV requires that 65% of all cap-ex is growth capex. 

 

I don't think paying 28x owner earnings is unreasonable for 15% growth the next decade when you have a moat this strong. But it does not have a margin of safety, and if growth rate is closer to 10% returns are likely to be disappointing. 

 

Lastly, I doubt there are many opportunities to run it more efficiently. I've worked at large silicon valley companies before, and if they cut back their option plans they are going to have trouble attracting the best candidates. Apple may only offer RSUs to a smaller proportion of employees but it also tends to make it up with cash comp and other benefits. There are no free lunches, if Google wanted to end the option plans, they pretty much have to replace them with something close to $22B in annual cash comp/bonuses. Beyond options there is also a ton of dead-wood, but that's true of any tech company with thousands of employees. It's hard to weed out without causing lots of collateral damage.

 

Look at it this way. What are the odds that the board cans Sundar Pichai, and more importantly, replaces him with an operational whiz tasked to make the company far more efficient? My guess is that Pichai has a 10% chance of being fired in any year, but the odds of him being fired and replaced with someone with permission to upend the culture the founders created and still prize is maybe 100-1.  So even if I'm wrong about it how hard it is to run more efficiently, odds are thin that it ever will be. This isn't Zuckerberg turning on a dime and not giving a crap about employee unrest. Google is fat and happy and even if it wasn't it's controlled by fat and happy founders.

 

 

[KCLarkin]

6 hours ago, Dinar said:

Net income is NOT after maintenance cap ex.  It is after depreciation, which is almost never = to maintenance cap ex. 

 

Correct. If you are starting with NI, you need to add back depreciation and then you can use whatever number you want for "
maintenance cap ex". Just don't double count. You can use depreciation or "maintenance capex" but not both.

 

Inflation is definitely an issue that will distort accounting earnings for many years for most companies. But many of Google's assets are generally deflationary, so the distortion may not be as great as imagined. I'll leave that to your discretion.

[KCLarkin]

3 hours ago, ValueArb said:

 

Is it still growing mid-teens? 2022 revenues only grew 10% over 2021, and 2023 revenues are only up 7% over same periods in 2022. Operating profits have been flat from 2021 to TTM 2023. This is what makes GOOG hard for me, I don't know any easy way of filtering out COVID effects. 2020 +13%, 2021 +41%, then it's been slow ever since. GOOG crushed 2010 decade averaging 21% revenue growth but growing $300B in revenues is way harder than growing $30B. 

 

When I say "growing mid-teens", I mean past tense (and I'm looking back to the last 10-K so one or two quarters won't cause recency bias). EPS growth is much better but when I eyeball it and try to ignore COVID effects, it's pretty hard to say this thing is not growing at least mid-teens.

 

Agree with you on efficiency. I believe it is both poorly run and unlikely to be better run. So please don't take this as a pitch for GOOG!

 

[bargainman]

I'll paraphrase Bezos and say "it's day one".  If the company ever thinks it's day two, it'll die.  Tech companies are on the cutting edge.  They need the best people and the monetary tools to recruit and keep them.  Without that they fade and get taken over by other up and coming tech.  wrt "I'd use a product other than Google if it were as good".  Chances are you use the default.  The default on android, ios, your browser etc.  Very few people change the default unless it's extremely compelling and easy.  Like when Chrome came out and people actively installed it instead of IE.  

 

[mattee2264]

On 12/3/2023 at 12:07 AM, bargainman said:

I'll paraphrase Bezos and say "it's day one".  If the company ever thinks it's day two, it'll die.  Tech companies are on the cutting edge.  They need the best people and the monetary tools to recruit and keep them.  Without that they fade and get taken over by other up and coming tech.  wrt "I'd use a product other than Google if it were as good".  Chances are you use the default.  The default on android, ios, your browser etc.  Very few people change the default unless it's extremely compelling and easy.  Like when Chrome came out and people actively installed it instead of IE.  

 

 

Above is a very valid point. You can improve near term results by cutting costs, capex, research spend etc. But the risk is that by doing so you will fall behind and in a winner takes all dynamic that is a risk you cannot afford to take so it makes business sense to err on the side of overinvestment and overstaffing and make sure staff are paid enough that they aren't tempted to jump ship and join a competitor. 

[formthirteen]

On 11/26/2023 at 10:52 AM, formthirteen said:

ANSS

 

Someone else besides me seems interested in ANSS.