What the Tech?
The Vaccine/Biden inspired rally and subsequent rotation into ‘value’ stocks struck down by the pandemic has helped the market print its best month since March 1988. It's left a lot of investors wondering, what the Tech? Energy stocks have been the best performers last month, surging by almost 30% vs the market up 11.2%. The All Tech index underperforming, up only 7.3%. The Marcus Today Portfolios have adjusted to the change in sentiment well. We have been vocal about the move into vaccine beneficiaries. But, for those who haven’t been as agile (many valid reasons spring to mind), and are still in the growth and momentum pandemic beneficiaries, questions linger about what to do. This article aims to answer some of those questions about the medium-term prospects for the underperforming technology names. Valuations this year have been difficult to assess. Put it in the too hard basket and ride the wave, the likely mantra of many. A notably profitable decision, but now with clarity returning into the investment landscape given the vaccine and US election, it is time to reassess where certain stocks stand. Articles and research attempting to explain the influence of low-interest rates and the acceleration of COVID-trends on the share prices are seldom without rubbery assumptions. As one commentator said last week, “If you do a discounted cashflow using low-cost money it's going to come out whatever you want.” The emergence of novel valuation methods like ‘price to revenue’ also labelled as red flags. Some analysts, in an effort to explain valuations, have looked at total addressable market (TAM) scenarios to rationalize the qualitative and quantitative factors that drive Australia’s tech sector. Some figures range from optimistic to ridiculous. Pro Medicus (ASX: PME), a radiology software company, has a TAM of $2.1bn, and a potential TAM of $7.1bn, according to UBS. That’s a big difference in actual vs potential. Its current market share is about 2.7%. By comparison, Afterpay’s (ASX: APT) current TAM is $248 billion, of which it has a 0.2% share; UBS believe it could eventually grab a 0.1% share of a $416 billion market. A pleasant but more likely fanciful set of numbers for shareholders in those companies. As for traditional valuations, it's clear tech companies are trading on multiples that imply the continuation of current growth rates well into the future. Within those numbers lie assumptions that competition will remain idle and consumer trends will remain constant, i.e at their COVID-inflated level. We all know that is not likely to be the case. While the pandemic has accelerated many business models, few tech companies can justify current lofty expectations. And the change in sentiment from the vaccine has put that to the test.[activecampaign form=64]
So, is the tech trade dead?Certainly not. Sentiment shared by many members in the Facebook group the other day. It’s likely slowing down and perhaps there will be a pause at earnings catch up to the heightened share prices. The overpricing of many tech stocks is one of the issues that has seen a rotation in the past few weeks. But we already knew tech stocks were overvalued by traditional valuation metrics. What’s more recent is the pace of underperformance has started to slow as momentum from the rotation loses steam. Tech has started December ahead of vaccine beneficiaries, like energy. A very short-term appraisal but not something that shouldn’t go unnoticed. Below is a list of the performance of every stock in the All Tech index since the first vaccine was announced. Highlighted in yellow are the companies with a market cap over $1bn. As you can see, majority of the big players in the index are in the red. (ASX:XRO) and (ASX: REA) the major players printing positive moves. (ASX: NXT,)(ASX: WTC),(ASX:APT), (ASX: ALU), (ASX: CAR), (ASX:APX), (ASX: PME) all in negative territory. Let’s have a look at some of the hardest hit names: KGN, NXT and APT.
Kogan (ASX: KGN)Travel and leisure names have, not surprisingly, already stolen the attention of discretionary spending. Demand for flights evident as borders reopen. Henry driving around Victoria attested to the demand and vibrance in the major tourist areas of the state. Bad news for the likes of KGN, which is down 31%.
- Work from home trends slowing as people return to the office.
- On the desk, we talked about the bear case given its considerable fall.
- UBS noted the margins achieved in the second half were not considered stable.
- Moderation in the surge of online shopping also likely as shoppers return to stores, driving customer retention expenses higher.
- Profit growth already starting to unwind as sales momentum slows.
- KGN also received its first strike against the remuneration report recently.
- Down almost 20% since the first vaccine was announced.
- No commentary on slowing data centre commitments or waning interest. The utility NXT provides not as volatile as consumer spending, yet it has suffered a similar fall to KGN in the vaccine/recovery rotation.
- It recently expanded a debt facility by $350m.
- Morgan Stanley noting its ability to deploy capital to achieve attractive rates of return.
- Added its next major catalyst (outside of a major contact) is likely to be planning approvals on M3.
- People aren’t using less data.
- UBS observing industry conditions remain buoyant and the broker believes in the thematic of NXT's leveraging off the data generation era.
- Brokers unanimously bullish, the average share price upside sitting at 22%.
- The stock never reached overbought territory but got close.
- Support around 1120c holding.
Afterpay (ASX: APT)
- Down around 6% since the vaccine.
- Slightly more diverse in its offering in relation to KGN as it is online and in physical stores. Though not really a fair comparison.
- October was a record month for underlying sales globally, notably performing ahead of this in November.
- Growth of new customers is accelerating since the end of Q1 in both the US and UK.
- Some of the highlights from its AGM trading update.
- Elsewhere, the BNPL ASIC review last month didn’t recommend any regulation in the sector but highlighted 1 in 5 consumers were missing payments.
- APT welcoming protocols to keep customers safe.
- A polarizing company when it comes to the broker view. Clearly, they all have very different assumptions in their models.
- The share price still implying eyewatering future growth numbers.
- Citi upgraded its earnings (EBITDA) forecasts for FY21-23 by 14% to 68%.
- November sales numbers revealed the US was now the major contributor.
- November underlying sales $2.1bn vs year-ago $1.0bn.