Slow recovery expected for tech stocks

Emulating their offshore peers, local tech stocks have swooned in the wake of rising interest rates which are deemed unfavorable to the funding-dependent sector.

Consisting of about 80 stocks, the ASX all-technology index has fallen about 30 per cent year-to-date and has tumbled 35 per cent from its November 2022 peak. The broader market has fallen around 6 per cent from its early January 2022 record peak.

 Vladimir Mitnovetski

Digital transformation shows no signs of slowing, says Vladimir Mitnovetski, of Dicker Data. 

Macquarie Equities notes that in the 1990s dotcom era, valuations declined by a further 56 per cent over 19 months, at a similar point in the cycle to now.

“History suggests a sector reset may take longer and be more painful than current market expectations,” the firm says in a sector report.

Dotcom stocks burgeoned in an era of then record low interest rates, with capital flowing freely to enterprises with no track record of success.

“In the current cycle, it could be argued that more companies have business models that are revenue generating and thus the overall environment is more robust,” the firm says.

“We would remain cautious, though, as the revenue generation has been driven by larger customer acquisition costs.”

In the pioneering 1990s the internet was a novel concept, as were mobile phones (let alone smart phones). E-commerce was no more than phone ordering a pizza delivery.

Now the sector is far more mature, led by 1990s survivors sch as Seek (SEK), Carsales.com (CAR) and share registrar Computershare (CPU).

“It’s different this time,” says Tribeca Investment Partners portfolio manager Jun Bei Liu.

“Back then, most tech companies weren’t making money. The Googles of the world are proven companies that generate billions of dollars of revenue. In the dotcom era they were small and a lot of the business models were concepts.”

The outlook for tech demand remains robust: on its updated numbers, Gartner projects Australian individuals and organisations will spend $117 billion on IT this year, 13 per cent higher than in 2021.

The Connecticut-based consultancy expects global tech spending of $US4.5 trillion, up 4 per cent on the previous year and focused on areas such as analytics, cloud computing, security and customer service.

In the dotcom era they were small and a lot of the business models were concepts.

— Jun Bei Liu, Tribeca Investment Partners

Mitnovetski cites the convergence of security and IT as a particular growth area.

For example, security camera footage used to be only stored on-site. Now, “having a hybrid cloud set up for back-ups is a key pillar in every security solution to ensure access to footage in the case of a security event”.

He adds that 5G networks have driven the “work from anywhere” movement, offering better connections during video calls and assuaging some cybersecurity concerns.

Mitnovetski adds that there’s no end in sight for ongoing chip shortages and logistics constraints, although the situation is gradually improving.

“It’s these great unknowns … that make markets jittery,” he says.

Bei Liu says investors should focus on stocks with proven business models, rather than those with aggressive growth targets with nor profitability that rely on capital to grow.

In the current sell-off, she says, many of the established stocks are being punished as severally as the speculative “concept” stocks.

The pandemic accelerated many tech usage trends that were emerging already, says Bailador Technology Investments (BTI) managing director Paul Wilson.

“Digital health is a great example,” he says. “It received a huge boost during the lockdowns and has not faded.

“Consumers became accustomed to doing things online. All of the fundamental macro drivers that were making tech so attractive are still in place, such as [the emergence of] 5G and cloud [computing].”

Other tech sectors are driven by their own fundamentals, such as the rapidly growing clean tech sector.

HLB Mann Judd corporate advisory partner Nick Guest says clean tech valuations are likely to remain well-supported, given the ESG (environmental, social and governance) mandates of larger investors (notably super funds).

“We are seeing them acting advance of any regulatory setting based on the expectations of their stakeholders to support carbon reduction,” Guest says.

Pure-play tech fund

As the only ASX-listed pure-play tech fund, Bailador Technology Investments (code BTI) is the canary in the coal mine on sector valuations, especially when it comes to private enterprises.

“Bailador has successfully realised cash returns on a number of our investments over the last 18 months,” says Wilson.

“We feel that now is a great time to have cash to deploy in new investments, as private company valuations are coming off, just as we have seen in the public markets for tech companies.”

Bailador’s model involves investing in mainly private ventures at an early stage and then realising value through a share market listing or private sale.

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