Terry Smith: Tech Companies Should Stop Behaving As Though Money Is Free, And Stick To Their Core Business

Johnny HopkinsTerry SmithLeave a Comment

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:

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• Amazon — It has already withdrawn from food delivery and technical education in India (who knew?).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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