During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Weber discussed The Magnificent 7: How Digital Ads Have Destroyed Other Forms of Advertising. Here’s an excerpt from the episode:
Scott: Yeah. Your point is correct. The concentration is high. There have been periods of time when it’s been high. Prior to a lot of investors lifetimes now, but NIFTY 50, period, et cetera. If you look at Polaroid and Exxon and the companies that were the darlings of the day, you didn’t have them all really in one industry. And certainly, you’re right, depending on how many numbers of companies you want to use in the top end of the index are 30-ish percent. But it’s also, on a year-to-year basis, over 80% of the performance.
Scott: It matters. Three of them are in the cloud business. Several of them are [unintelligible [00:23:54] There’s decent concentration around a business, which I’d further point out is not as capital intensive as the businesses were NIFTY 50, period. I think Michael Mauboussin and others have done great work on the distinction between an income statement today versus what you would have seen back then. But all that goes to your greater point, which is, yeah, they’re good businesses. We don’t happen to own Meta, for example. You could look at that and see– For example, the product monetization arc coming in Reels, and you could see and get excited about that. But at the same time, you’ve got a management team that was losing Sheryl Sandberg, who many would have said was the grown-up in the room, the adult at the party, so to speak.
You’ve got a management team that’s throwing tens of billions of dollars at reality labs. Here we are today, fully capable of putting goggles on for this conversation, and yet we choose not to do it. I don’t know where that market will be. I just know that it’s an incredibly profitable business that, in my estimation, was flushing dollars down the toilets. But for a stroke of luck, they had a change of heart to reduce some exposure there, and it turns out that the Nvidia chips that they bought have application for their AI effort. Blind luck, which has been helpful to them. But it doesn’t change the fact that the underlying business at Facebook is a good business. The underlying business at Google is a good business. Apple is a good business. Apple’s a tech company that is essentially a high margin staple at this point.
Further to that, I shudder at the fact that I’ll be the first to bring up this whole growth versus value thing, because I think that [Tobias laughs] the end of the day, we’re going to preach value. Our firm, our roots are in value. But at the end of the day, I’ve never met a value investor who would swear off growth or a growth investor who would voluntarily overpay. It’s just a question of where you think that is. But point of fact, a lot of these businesses are in the growth hand to value index. So, you don’t have a disparity on that metric. You don’t have a huge disparity on what they do. You just have this crowding about the top of the index, which, to me, says that, if you want diversity, you want to get away from that, maybe–
First of all, does that undermine the validity of the S&P 500 as a benchmark? Look at it over time. Far be it for me to cast a shadow on their business wall. By the way, that’s probably the greatest business model. You get to use our name and you pay me a bigger and bigger fee every year, and guess what? We’re going to raise the rate more than inflation. I’d love to own that business.
Tobias: It gets cheap every now and again.
Scott: Yeah. I just feel like, as an investor where capital preservation is a preexisting condition for survival, having all your eggs in one basket is risky. Now, we’re paid to be measured against the index, and so we have to be aware of it. But our goal is to compound our client’s capital at a mid-teen rate. We want positive asymmetry. In other words, if we’ve got a 50% upside expectation, we cannot have a 50% downside expectation. It can’t be a flip of the coin. It’s got to be a better than 50-50 bet. But we want to compound in a mid-teens rate because at the end of the day, our clients hire us. Yeah, they choose us instead of, or maybe in complement to an index, because they think that we can do better. Part of doing better is not looking exactly like it. And so to finish first, you must first finish. That’s why having an absolute return goal, I think, is an essential component of anyone’s approach. Otherwise, you’re just playing a game. You’re not investing.
Tobias: Yeah, I couldn’t agree more. I think it’s an interesting construction of those top are. They’re all regarded as being tech, but they are still like– Netflix is quite a different business to Apple. Apple’s quite a different business to Google. Microsoft’s completely different again. Amazon’s doing something completely different. Again, even though there is a lot of overlap with the cloud, and they’re probably buying and selling a lot of services to each other too. That concentration makes me nervous when I see it get up like that. When I see things that are unprecedented in the market, I always get a little bit nervous.
Scott: Well, they’re all ad businesses at the end of the day. If you think about it, they’ve destroyed pretty much every other form of advertising. That’s because the efficacy of a digital ad at various forms is way better than putting something in print, or radio, or even up on the billboards. It’s measurable in a way that those other forms are not, and it’s more interactive. It’s just– [crosstalk]
Scott: Yeah. It created a new space. And essentially, in so doing, depending on how deep you want to go in the ad rabbit hole, you go from being an advertisement to being a commission on a sale at the extreme.
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