The End Of Mega-Tech Exceptionalism?

The End Of Mega-Tech Exceptionalism?

Earlier this month, I asked if mega-cap US tech shares were "imposters" all along. It wasn't an especially novel query on my part. Effectively, I was just recapping a thesis espoused by a handful of skeptics who've repeatedly argued that some of the best-known growth stocks in the world might be cyclicals in disguise. If that were true, I wrote, "it was a pretty convincing ruse. And it went on for a long, long time." My point was that there's a threshold beyond which claims to prescience are d
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5 thoughts on “The End Of Mega-Tech Exceptionalism?

  1. I am in software, so I am inclined to think in that context, and I view the new champions to be those firms who build software across, or on top of the three big cloud providers. I think of GCP, Azure, AWS as the foundation and firms like Hashicorp and Confluent to be the new titans. For me, it’ll be interesting if some of these cross cloud platform providers get acquired by a particular cloud platform.

  2. That 2000 cohort looks awful sans Microsoft. That being said, the current mega-cap titans are on much firmer ground than the 2000 versions. Hard to imagine their dominance of the S&P 500 eroding like the 2000 cohort given that their valuations are based on much stronger cash flows, profits, and market dominance. What percent of S&P 500 profit and cash returned to shareholders comes from those 4 companies (and feel free to throw Meta in there) compared to the 2000 mega-caps?

    I’d also argue today’s mega-caps have much larger moats around their businesses. The primary threats come from the other mega-caps, but most of them have failed to make a meaningful dent in each other’s businesses with the exception of Android and Azure.

    Lastly, EPS growth will remain strong. Even if cash flows flatten, those buybacks become even more effective when valuations are down. To me, these are great value stocks with growth stock potential at these levels.

    1. Moats, yes but none of these big tech firms can escape their own internal cycles. Even back in the 1960s, when IBM was totally dominant in the computer industry made its living from the gigantic Model 360 in all its versions, the firm’s biggest challenge was how to manage its internal cycles. Innovations make most true tech obsolete in a relatively short time and any tech firm affected by these life cycles has to update. But they still have aging legacy equipment to service and when the new stuff is ready for sale, the old stuff is dead and stops selling. If the transition is somehow mismanaged it can stop the train and cause significant dips in performance. Apple has to fight this, as does Microsoft, Nvidia, Cisco, Intel, Applied Materials, and others of their type. Old codgers like me remember when this problem of cyclicality was called the Osborne Effect because of the existential difficulties it created for the makers of the first true laptop computer. All of tech is cyclical but the cycles are primarily driven by the life cycles of innovations rather than those in the economy.

      One other point to remember here is that there is no such thing as the “tech industry.” The word “industry” is defined as a group of similar firms producing goods or services which are close substitutes for the outputs of other industry members. Microsoft is in the software industry, for example. Tech is a word which describes a large sector of the economy and which contains many distinct industries. It is important to remember that the different industries which are part of the tech sector each have their own distinctive behaviors and cycle at different times, driven by the life cycles of their particular businesses. This is not sophistry, it is economics.

  3. Ah, AAPL, the Last FAAMNG Standing. Plugging consensus forecasts and current rF into a basic DCF valuation model suggests that AAPL’s current price discounts terminal growth of almost 6%. Since no company can grow at 6% forever, plug in 2% to 3% which returns valuations something like -30% to -40% down from current price.

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