RIM, Google, Apple, Dell, HP, Cisco, Microsoft, Xerox etc. The list really goes on. The other list that goes on and on is of value investors going long these names. I think value investors are missing greater pitfalls than they perceive with some of these companies.
This is glaringly obvious to me, but technology is a much faster changing industry with more out of left field developments than value investors are traditionally accustomed. I don't see how people who traditionally trumpet their ignorance of these companies all of a sudden have the comprehension to make the investments in these companies. People seem to be papering over this in order to buy what would otherwise be considered cheap stocks.
Here is where I think many are going astray:
1. Ex cash PE ratios and financial strength - Typically a big net cash position attracts investors. It's a nice thing in a net-net stock and really any stock for that matter. The companies are financially strong, no doubt. The point of contention is that this strength is being applied to expanding the company in different directions (Dell, HP, Xerox, Microsoft, Google). Even where it isn't being spent poorly, the cash is overseas. I know what a dollar of overseas cash is worth to a US company - 65 cents. It is more nuanced than that, but dropping the cash balance right through the valuation doesn't reflect the underlying reality (neither does 65 cents).
2. Incentivized and intelligent managements - Maybe its heresy to say that someone with a multi billion dollar stake in a company isn't truly incentivized, but these guys aren't. These guys are egomaniacs for the most part focused on empires. Many of these companies have historically had such fantastic models too, that they can be run by morons. This is less the case when a business is acquiring businesses and entering new lines. Margins are going to be different in the future. Why should people trust Michael Dell to do the right thing for public shareholders? He can and is doing whatever he wants. Whereas large inside ownership is usually a good thing in the eyes of value investors, it is dangerous in almost all of these stocks.
3. Expanding into high margin areas - Everyone is seeking to enter high margin areas: search, services, switches, etc. Even if you agree with the acquisitions or overall strategy, everyone is moving into the same spaces. Not only does this drive up prices paid in the acquisitions and expansion, it drives up the level of competition in those fields. Dell wants to be IBM. HP wants to be Oracle, IBM, and Cisco. Microsoft wants to be Google. Google wants to be Facebook. Competition is bad for investors. It's the last thing you want. This is the absolute worst kind since people are paying these high prices to enter competitive fields. It is especially dangerous when these companies have seemingly unlimited resources relative to the markets they are trying to enter.
My criticisms don't all apply to all the companies that fall under the cheap large tech category, but I think investors are guilty of overlooking some of these things. I think Tweedy Browne articulates a reasonable case for Cisco while expressing some reservation. I'm sympathetic that Dell is being misperceived as a consumer PC manufacturer that is being beat by Apple, even though that doesn't reflect the sources of its profit. I'm staying away though since change is more rapid than people acknowledge and their attractiveness is overstated in my opinion.
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