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- In his new book, Adam Seessel recommends investors view tech stocks through a value investing lens.
- His book, “Where the Money Is,” has received widespread acclaim from investors like Bill Ackman.
- Seessel also laid out why traditional accounting makes tech stocks seem more expensive than reality.
Thanks to their unrivaled market dominance over the past two decades, technology firms have long been considered the darlings of the growth stock world. Indeed, four out of the top five largest companies by market capitalization — Apple, Microsoft, Alphabet, and Amazon — all belong to this category of digital behemoths, with each commanding a consumer vertical in its own right.
That’s why the title of Adam Seessel’s new book, “Where the Money Is: Value Investing in the Digital Age,” may seem like a bit of an oxymoron — after all, how can you invest in value within the high-growth tech sector? But Seessel, who co-founded Gravity Capital Management, has devised a framework to adapt value investing principles for tech companies, and in the process has shed some new light on their valuations. The idea has struck a chord with readers — the book has already received widespread acclaim from renowned investors such as Bill Ackman, who said it was one of the best on investing he’s read in years.
According to Seessel, these value investing strategies are even more critical for investors to consider amid today’s macroeconomic backdrop marked by high market volatility and uncertainty as the US economy officially slumps into a technical recession.
“The economic cycle is going to do what it’s going to do,” he told host Trey Lockerbie on the July 21 episode of The Investor’s Podcast Network. “But if you have a strong business with a strong customer value proposition and a moat to protect that business, you are going to win, period. And that’s really how I approach the market.”
The best way to profit in an environment like this, Seessel continued, is for investors to seek out the individual businesses that have specific advantages over their competitors. Rising costs of properties, plants, and equipment have cast a favorable light on the traditionally capital-light tech stocks. And although the once-beloved sector has fallen from the market’s top — rightfully so for the most part, said Seessel — he still sees potential in some of the companies that have been hardest hit, yet still offer competitive advantages to investors.
Seessel’s three-variable investment checklist
Seessel’s value-tilted strategy centers around the three most important variables for superior investing — a stock’s quality of businessits quality of managementand its asset price. To make it easier to remember he’s given this checklist the acronym “BMP.”
According to Seessel, a firm’s business quality is the most important metric investors should consider.
“If you start out with a crummy business, it doesn’t matter what you pay. The business will fail and degrade and eventually go out of business,” he explained. “You have to have a business that has competitive advantages — a secret sauce, an edge.”
But with over 90% of technology companies “doomed to failure or mediocrity,” Seessel said that it’s critical for investors to recognize strong competitive advantages, which can include factors like a disruptive and innovative product, good brand recognition, and a low-cost model . During the podcast Seessel referenced Tesla, Amazon, and Google as companies that fall into this category.
On the other hand, Seessel doesn’t believe Netflix has a true advantage over its competitors, calling the streaming war an “arms race.” He views Meta in a similar light, referencing its “vulnerable” core business and its need to acquire numerous competitors like Instagram and WhatsApp to improve its social media presence.
A firm’s management quality obviously also plays a huge role in its success, Seessel said.
While Seessel says that “Google probably has a better business pound-for-pound than Amazon” thanks to its asset-light business model, Amazon has been a better investment — and that’s all thanks to Jeff Bezos’ savviness and ability to marry old school business principles with a new-age digital economy.
What investors should look for in a management team, said Seessel, are “old-time stewards” that nurture a company and position it for future growth down the line — rather than executives “skimming as much as they can” before they retire.
A good management team should also inherently understand which assets drive the most value and highest returns for a firm, Seessel continued. “There’s got to be a cold-bloodedness to your management,” he said.
Finally, Seessel highlighted a stock’s price as the deciding factor for investors to consider.
“I couldn’t call myself a value investor if I didn’t think price was the veto question,” he explained. “You have a great business and you have a great manager, but if the price isn’t right, you’re going to have a crummy investment.”
For the most part, however, technology stocks have had a historical track record of expensive valuations. Despite this, they’ve still been able to appreciate quickly — one central problem Seessel also addresses in his book.
“That leaves us with an existential question. Either we’re overdue a dot-com bust like we’ve never seen before, or the metrics that we’ve used to calculate price are wrong. And I conclude that the second premise is true he said.
Traditional valuation methods are outdated
According to Seessel, the technology sector looks even more promising than traditional accounting principles might show on paper because these long-adhered-to methods are actually extremely outdated.
“Every time tech makes something better, faster, cheaper, it doesn’t necessarily get recorded in the stats. These measures like GDP and generally accepted accounting principles (GAAP) — they were built for the Industrial Age,” Seesel explained.
Current accounting guidelines allow for physical assets like factories to depreciate over their lifetimes, which significantly cuts down annual costs for these companies. However, research and development expenditures — which are typically high for tech firms — don’t follow the same principle of depreciation and must be expensed immediately, Seessel explained.
“Tech companies have underreported earnings basically, because of the outdated tech accounting rules,” he said. “Until they change, we, as intelligent investors, need to make adjustments.” One metric investors can use for better accuracy is to divide an expense’s lifetime value over its cost of capital, he continued.
In 2020, traditional GAAP principles showed that Amazon’s e-commerce margin was a mere 2% — vastly below Walmart’s margin of 6% that same year.
“If you believe that, then I don’t think you should be in the business, because it’s absurd that a brick and mortar retailer would have three times the profitability of an e-commerce retailer who has no stores and who does all their business online,” said Seessel.
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