The minefield of investing in software stocks
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Is investing in local software companies worth the bother?
Investing in software companies is not for the unwary, with ARQ Group (ASX:ARQ) the latest name to snare one of the share market’s smarter investors around as its ambitions have imploded.
Formerly known as Melbourne IT, ARQ recently replaced senior managers at key business units, and is now to replace its chief executive, signalling the extent of its difficulties. The company has also appointed Macquarie Bank to help with possible asset sales as it seeks to find a way out of its woes.
ARQ shares emerged from a trading halt Tuesday, only to fall to 30c, its lowest levels since the tech wreck of the early noughties.
In mid-morning trading, the shares had moved off the lows to trade at around 37c, down 32 per cent on the day. The share price is a far cry from the highs of over $3.50 less than two years ago.
Its woes are only the latest to hit the sector.
In May, Citadel Group (ASX:CGL) shares slumped as it slashed its outlook, prompting analysts to wind back their view on its prospects, while others such as Empired (ASX:EPD) and PS&C (ASX:PSZ) have continued to frustrate.
When approaching the sector, cloud-centric plays such as Elmo Software (ASX:ELO) have found favour, but companies with a large exposure to legacy systems, for example, have struggled.
This was the case with accounting software houses such as MYOB, which was recently taken private, and Reckon (ASX:RKN), which have struggled when competing with rival upstarts such as Xero (ASX:XRO) that are fully cloud-based.
With ARQ, listed investment company Cadence Capital, which is run by one of the market’s smarter investors, Karl Siegling, blamed his large exposure to ARQ as being a big factor in the poor investment performance of Cadence.
Cadence bought into ARQ six years ago, gradually building to an 18 per cent holding. But the usual litany of successive earnings downgrades, the loss of key clients, cost blow-outs on work underway and the like has brought the shares to long-term lows.
Things got so bad that Siegling went onto the ARQ board only a matter of weeks ago, to get a better grip of what is going on.
Now, even though the September quarter is yet to close, ARQ has disclosed slumping earnings, which leave its earlier full year forecast far out of reach.
At the same time, clients are reviewing spending as they move to cut costs, ARQ said, with banking and finance, aviation and telecoms sectors specifically cited, which could see software companies with exposure to these sectors struggle in the coming months.