It may be new investors trying to get too ...
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w w w . a f r . c o m /Tech dip offers investors chance to finally get on board
Tech stock prices are set to stay in the doldrums in the coming months, giving people a chance to buy into names like Altium, Nitro and Xero at their most attractive valuation in years, according to fund managers.
The S&P/ASX All Tech Index has lost 6.5 per cent so far this year, as the sector has been sold off indiscriminately thanks to increasing bond yields and the possibility of higher inflation, which reduces the prospective value of profits made by growth stocks like tech companies in the future.
Since its year-to-date peak in February, the All Tech index is down more than 14 per cent.
Michelle Lopez, Aberdeen Standard Investments’ head of Australian equities, said the asset manager had taken the view that the rotation out of tech would continue at least until the second quarter, if not longer.
“This is a normal consequence of where we’re at in the cycle,” she said.
“Interest rates are very low … When you start to see the long-end of the yield curve pick up, there’s only one way they can go from here and that’s higher – and that means the risk for growth stocks is a live issue.
“We don’t see rates coming back, so even if you take the status quo, it’s still not positive for growth.”
But Ms Lopez said with the falling prices, there are some tech stocks that are starting to look attractively priced.
Rather than looking at the “COVID winners”, she said it was actually those companies that had been affected negatively by the pandemic that could have an upswing this year.
“Ones we’re looking at in the last month more closely with the sell-off are those like Altium, which wasn’t a COVID winner. It was a COVID loser, and it’s come off even further in the rotation,” she said.
“Arguably it’s too early to get back into tech, but there are some selective companies looking attractive and we’re starting to dip in. But, we’re mindful that it’s just so levered to what is going on from a bond yield perspective.”
Some of the local tech stocks to take the biggest hit in the bond yield-driven sell-off have been Afterpay, WiseTech and Nitro, down 30 per cent, 15.7 per cent and 15.6 per cent respectively since mid-February.
, where the NASDAQ Composite index is down 5.8 per cent since mid February.
Like Ms Lopez, Shaw and Partners senior analyst Jules Cooper said he was looking at stocks that could be leveraged to the COVID-19 recovery, plus those he believed had been over-sold.
“Those that stand out as being worthy of consideration are Nitro, Whispir and potentially even Class,” he said.
“We don’t have the Zooms or the clear COVID-19 beneficiaries in Australia. I actually look at the next couple of years as being really positive for pretty much all software stocks fundamentals.
“The share prices in aggregate are looking more attractive and in line with where they were trading prior to COVID-19.”
said that as long as there was commentary about higher bond yields, tech stocks would continue to face substantial headwinds.
He believed that many of the tech stocks still had strong structural growth trends, but there would need to be specific positive catalysts to push their prices up.
“Altium, WiseTech, – those flagship leaders we think across the board have really strong trends. [But] we think this could be a scenario where absent a catalyst, we think the rhetoric could continue drifting valuations down,” he said.
“When the businesses have high revenue multiples, there’s no valuation line in the sand.
“Compare them to [fintech software company] Iress – we upgraded them because they have a 5 per cent dividend yield and that’s a defensible line.”
While growth stocks have been sold off significantly, Iress is only down 6 per cent since mid-February. Mature, profitable share registry tech company Computershare is trading up 6.5 per cent in the same time frame.
Mr Pierson said the big thing that investors should watch for was company-specific catalysts, which could set stocks apart from the broader sector and make share prices more defensible.
“Xero went from $80 to $150 last year, now back to $120 and nothing changed. Business conditions if anything are slightly more favourable.”
One reason why the sell-off has been so dramatic is because tech stocks generally have been priced for perfection.
The sector has been propelled by structural trends about the increasing digitisation of processes and mass adoption of cloud-based subscription software, and in a low-growth environment investors have been willing to pay handsome premiums to date.
According to , that makes them sensitive to small changes to the discount rate (the interest rate used to determine the present value).
“From our perspective, we build in enough buffer to the valuation so that if discount rates do increase, then we have that buffer,” he said. “If you value them at current interest rates and expect them to stay there, there’s more downside risk.”
Mr Price said prices had fallen enough that he had a “watching brief” on a few tech stocks.
“That’s the game – to work out which ones have fallen too much, or which ones are vulnerable to sell-off, and you buy in the weakness,” he said. “You need to [also] pick the ones where growth will beat consensus over time.
“It’s not just the larger names; there are also mid-sized names that are out of favour and aren’t getting a lot of attention.”
Wilsons head of Australian equity strategy John Lockton said the next catalyst for any major price changes in the local tech sector would be the upcoming US first quarter earnings season.
He said the market would be looking to cyclical stocks, such as the social media companies, and those with advertising-related revenue, such as Google, to see if they record strong growth rates.
If they do, that would likely provide a boost for the whole sector, but it’s far from guaranteed.
“You need to see growth maintained or accelerated [post-COVID],” he said.
“What was 25 per cent growth, if it’s now 20 per cent growth, that wouldn’t lead to a re-rate.
“There’s greater scrutiny on the genuine top-line revenue growth stories. We might have seen the peak multiples for those in terms of a revenue to enterprise value multiple.”
DYOR
