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GOOGL·Warren Buffett Just Bet $10 Billion on Google. The Catch? You May Already Be Too Late.
From a valuation perspective you cannot apply Ben Graham & Warren Buffet's value investing model to today's tech businesses. Here' why. We are in a completely new capital market paradigm. In BG's era companies (old school businesses) fell into one of five main sectors: industrial, manufacturing, energy, financial & retail . These businesses were mostly capital heavy, had low gross margins (financials excepted), low FCF, limited expansion & diversification oppotunites, and - due to GAAP - modest and predicable EPS growth due to GAAP's requirement to write off capital investment over the useful life of the asset. Then the cycle started again. More capital invested etc. etc. Financials (old school banking) weren't that spectacular either because they were primarily funding old school businesses and consumer credit. Then along came technology in the early noughties. These new tech business (take GOOGL since you are trying to squeeze it into a BG era valuation paradigm) were initially capital heavy with R&D but once the IP was created and the R&D costs written off in the year it was incurred (GAAP so no ongoing depreciation charge or capital maintenance impacting EPS) they very quickly turned into cash cows with higher (a) gross & net margins, (b) y-o-y revenue growth, (c) FCF and (d) recurring/expanding revenue streams. In addition these new tech businesses built fortress balance sheets, wide moats (IP rights & switching costs) and high quality earnings. So, the market needed to recognise the financial impact of this unique type of business and apply a very different valuation paradigm to the old Graham & Buffet model. Today, this is the reason tech (like GOOG, NVDA, MSFT, AMZN, et al) trade at high multiples. It is not animal spirits or market over exuberance. It is however, the reason why tech is so sensitive (volatile) to interest rates because tech's higher multiples reflect the PV of higher future cash flows/revenue growth.
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