Tech

VALUE: After Hours (S07 E32): Value Investor Buying Big Tech

Web Desk September 24, 2025

0 3 5 minutes read

During their recent episode, Taylor, Carlisle, and Kai Wu discussed Value Investor Buying Big Tech. Here’s an excerpt from the episode:

Jake: Yeah. What’s the biggest surprise jump from what we’d say traditional value would say it was wildly overpriced, or not good or something versus the insight that you have from your process?

Kai: Yeah. Toby and I were talking a little bit about this before the call. I think Mag-7, that’s basically the entire game these days. All people think about is Mag-7. It has, to be fair, driven the returns of the market for the past few years. And so, actually, in 2021, when we launched our product, some of the largest holdings– This is something that’s public, so you can look it up. We’re actually Mag-7 stocks. The Wall Street Journal actually wrote an article on us saying, “The value investor buying big tech stocks,” as if it were a weird thing, which it is. But maybe today, Meta is in the index, but it wasn’t always like that. And the question is, why?

These stocks, many of them traded at price to earnings ratios that were very high. Like, Nvidia was at $100, Amazon was really high. Why would we buy these things? I think the reason is, is that if you add into the mix, these intangible assets, Nvidia has CUDA network effects. They have a culture that’s well known to be innovative. They do hire a lot of PhDs and employ a lot of very talented folks. You tally all these things up. Actually, on a real basis, these stocks were at the time at least amongst the cheapest things on the market.

Now, obviously, fast forward four years and times have changed and everyone knows Nvidia is a great stock and the stock price is up a million times. So, maybe it’s no longer cheap. But you get the idea that when you adjust for these things, it does change the relative. It reshuffles the deck a little bit generally in favor of intangible intensive industries like technology. But more importantly, even within those industries, certain names tend to benefit more from these adjustments than others, of course, as you would expect.

Tobias: So, traditionally, a tech company, they expense whatever they or it runs through a salary or something like that, so it’s not capitalized and depreciated subsequently. It’s expensed in the year that it’s incurred, so that reduces their earnings and their book value as well? And so, then if you make these adjustments, you increase their book value and you’re reducing their earnings– you increasing their earnings as well?

Jake: Increase earnings and then reduce return on invested capital typically.

Tobias: Yeah. That was where I was going. So, doesn’t it make them look less valuable if you do it that way?

Kai: It makes them less attractive on an ROIC or ROE basis. I think Mauboussin done some good work on this, where he looks at Microsoft, and it has an insane ROE. And he’s like, “All right, this thing has insane–” But the capital base that Microsoft has is not true. It’s an illusion. If you adjust for the intangible capital, all the R&D Microsoft has done. All right, well, now the ROE of Microsoft is like a normal level. So, you see that effect.

I think it’s important to also mention that for this, this can actually operate in reverse. So, what really matters is for the earnings-based approach, is the rate at which you’re investing in R&D relative to the depreciation or amortization in this case of R&D. So, in the case of you’re a steady state company, stable company and you’re no longer investing in R&D, you’re just like coasting, you have a lot of R&D capital from prior years is now depreciating or now amortizing, this actually will be the opposite effect.

So, we’re really only talking about companies that are investing in growth and are on this accelerating growth curve, not those that are maybe R&D intensive but are on the decline mature companies.

Jake: You can sweat the assets in a more traditional sense of underinvesting and maintenance and you’re just boosting cash flow short-term. Do you see the same thing when it comes to IP or intangibles where some companies are sweating their intangible assets?

Kai: Yeah. But you definitely want to see companies that are continuing to invest in the future. I think that’s something you do want to see. One interesting thing I’ve been looking at more recently is this, which is– I’m obviously a fan of asset-light businesses, like Buffett and most people. [chuckles] But one of the interesting we think we’ve seen with the Mag-7 in particular has been this pivot from this beautiful asset-light business model like Google Search to what’s effectively like a utility.

Meta is spending 30% of their revenues on capital expenditures, which is the same as the average utility. They have a tech multiple, but they’re basically trying to build utility. There’s many game theoretical reasons why this is happening, and we can go back to prior investment booms and it makes sense that this is happening. It’s not surprising.

But one thing I did look at in the context of this trying to understand the implications of CapEx, is to what extent does changes investment rates lead a presage outperformance or underperformance for a stock. And so, this is a really well-known finding from Fama and French, the so-called investment factor, which is this idea that companies that invest tend to over extrapolate the prospects of the future and tend to then underperform.

So, I did something interesting which I actually bifurcated that into two components. What if companies that invest heavily, but they invest in intangible assets versus tangible assets? The companies that are investing in intangible assets do just fine. It’s really the companies that invest in physical capital expenditures that have historically at least suffered. Again, on average, I’m not saying that this is going to happen to Meta, I’m just saying that on average, this has been the pattern that investment in physical infrastructure has not been rewarded by the stock price.

This is, of course, what we saw in the dot-com boom when you had companies like Global Crossing basically go to zero. We saw it in the railroad boom as well. Now, in this case, it’s a little bit different. I don’t think Meta has any balance sheet issues or any shortfall of free cash flow, but definitely, it’s a concerning development, especially for a component of the market that’s now 40% of the index.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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