Here’s something that would surprise a lot of people: every few years we have the chance to buy one of the Big Tech companies on the cheap. In the mid-2010’s it was Apple (we remember interviewing deep value investor Tobias Carlisle in 2017 who mentioned Apple had been turning up at the top of his deep value screens which, in hindsight, was around the same time Buffett was buying). Last year, Meta got stupidly cheap and has more than doubled in price since then. No one believes these companies are bad businesses. So the question becomes, why are they getting so cheap so often?
Andrew Walker, author of Yet Another Value Blog and recent guest on Equity Mates (Apple | Spotify | Website), has written a blog post asking this question.
“Just about every major tech company has gotten really cheap at some point over the past decade. And not cheap in a “it’s only trading at 20x P/S and peers are at 30x” sense, but cheap in an absolute sense… AAPL and MSFT trading for ~10x P/E in the mid and early 2010s (respectively), but just last year you had the chance to buy META at ~10x P/E with net cash on their balance sheet and/or GOOGL + NFLX at mid-teens P/E.”
Andrew’s view is that despite how dominant these businesses are today, investors get worried about how durable their moats are (and therefore, by extension, how dominant these businesses will be tomorrow). Can Facebook maintain its network effect in the face of new social media competitors like TikTok? Can Apple keep growing when iPhone sales are slowing? Can Netflix retain its lead in the face of more and more streaming competition?
These concerns are not without merit. The history of the stock market is a history of once dominant businesses being disrupted. That process of creative disruption is what drives the stock market ever higher. And one day, Google, Apple, Facebook will lose out to a new generation of great companies. But until that day comes, we should remind ourselves that we don’t have to find unknown companies to make great returns in the stock market. Every few years a very well-known company will spook investors and get very cheap. If we can keep our head in those moments we might see an opportunity like Meta, which is up almost 250% from its November 2022 low.
This is an excerpt from our Thought Starters email. Once a week we send you 5 interesting articles that have caught our attention, to get you thinking. No spam, we guarantee.