Terry Smith: Tech Companies Should Stop Behaving As Though Money Is Free, And Stick To Their Core Business
The Acquirer's Multiple2023-01-30T09:06:55-05:00
In his latest Annual Letter, Terry Smith explains why tech companies should stop behaving as though money is free, and stick to their core business. Here’s an excerpt from the letter:
Q4 2022 hedge fund letters, conferences and more
However, as well as the lower valuations caused by higher rates, technology stocks are facing some fundamental headwinds. A slowdown in the growth of tech spending is hardly surprising after the massive growth caused by digitalisation during the pandemic.
Moreover, the cyclicality of tech spending and online advertising is probably about to become evident as the economy slows and maybe falls into recession. It may be greater than in the past simply because tech spending has become a much larger proportion of overall corporate and personal spending.
However, there may be a silver lining in this cloud (no pun intended) as this pressure on revenue growth may cause some of the tech companies we invest in to stop behaving as though money is free and halt some of the less promising projects outside their core business, such as:
• Alphabet — Its hugely loss-making ‘Other Bets’. Lightning does not strike twice. It has a good core online search and advertising business.
• Amazon — It has already withdrawn from food delivery and technical education in India (who knew?). It has a highly successful ecommerce and cloud computing business on which to focus.
• Meta — Stopping or cutting spending on the metaverse? Without that spend we would own a leading communications and digital advertising business on a single-figure Price/Earnings ratio (P/E).
You can read the entire Annual Letter here:
Fundsmith 2022 Annual Letter
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The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.
It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.
The Acquirer’s Multiple® is calculated as follows:
Enterprise Value / Operating Earnings*
It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com.
The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT.
Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up.
Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC.
He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener.
All metrics use trailing twelve month or most recent quarter data.
* The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
