IT Service Sector as an Investment

[Ruoto]

@elakkeelle35v

AI. As a coder myself, I just don’t see AI having an overall positive impact on consulting firms. Producing code has become so much easier that no client will pay the kind of prices for software that they used to. Even if there might be more projects and consultants can do more, I don’t believe the big picture is positive in terms of profitability. We’ll probably see many new small consulting shops (2-10 people) competing for smaller projects now that a single developer can handle larger workloads. Consultants will also be kicked out of client projects as companies’ in-house coders can do much more, and even juniors can produce better results. So why would companies buy so much IT consulting anymore? This is already clearly visible in the large company where I work as a coder. One coder does roughly the work of ten. In my opinion, margins in consulting firms are bound to shrink. This might not show up this year or next, but it probably won’t take long. I personally don’t want to own any IT consulting firms anymore due to AI. I use AI a lot in my work as a coder, and I believe the biggest benefit flows specifically to the client companies, who can use it to streamline their operations and use their own workforce more efficiently instead of buying expensive services from IT consulting firms.

Good reflections.

I’ve been pondering the same thing myself, but I don’t think I have enough competence. I did manage to get my “IT driving license” as a kid, but I doubt I’d even know how to play Minesweeper anymore.

At some point, the “Circle of Competence” mental model developed and popularized by Warren Buffett and Charlie Munger must have slipped my mind, as I’ve been throwing money at the IT sector head-first.

Even now, nearly 8% of my portfolio is in these “Pölhölä keyboard bashers.” (Tieto, Digia, Gofore, Vincit, and Solteq)

The current situation is that Vincit and Solteq are so far in the red that there are only pennies left in them. So, mentally, they can be completely written off. And they have been clear losers in the current market environment.

If I had to put my money into only two of all of these right now, those companies would be:

Gofore. (The highest quality IT company on the Helsinki Stock Exchange. The stock has dropped sharply because people paid high multiples for that quality, and the public sector closing its investment faucets has hit Gofore’s fingers quite hard. Previously, Gofore had a relatively large share of those public sector contracts.)

Digia. (The stock price has been stagnating (mörnimistä) for several years, but the company itself has been a surprisingly steady performer even in this quite miserable market situation. The broad offering seems to be biting quite well.)

I’ve been thinking about reducing Tieto’s weight or even selling it entirely for a few years now, but now that we finally got a change of CEO, there’s starting to be light at the end of the tunnel.

Divesting the non-core branches is a good thing in my opinion, even if they went a bit too cheap.

The new CEO seems quite competent.

Listening to the interim reports is as interesting as eating cold oatmeal.

Tieto’s reputation as a company or employer seems to be around “meh” at best.

Ending of Inderes coverage. In the future, I’d have to figure out for myself whether the company is doing well or poorly.

Let’s start a poll for those working in the IT field and those who feel they have some kind of competence in the matter.

Is AI for the IT industry…

• A positive thing. (I have increased sector weighting or at least kept it the same)
• A negative thing. (I have reduced sector weighting)
• A neutral thing. (I have kept the weighting the same)