There was a huge gap between ASX tech winners and losers last year
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There was a stark contrast between ASX tech winners and losers in FY18 reports top investment expert Tim Knapton of TechVoyage
Although the financial year to June 2018 was a good one in terms of general tech investor sentiment it was also a year of tremendous volatility.
The average price rise for the 460 ASX and NZX tech stocks in our TechVoyage database was 15 per cent — but never before has the disparity between hot and cold stocks been so stark.
Almost 120 stocks rose by more than 50 per cent over the year to June and almost 120 fell by 50 per cent or more.
In other words, over half the sector was very dramatically re-rated or de-rated.
What that means of course is that stock selection and timing is utterly critical.
The hottest sub-sectors were e-commerce (up 54 per cent), software (up 25%) and fintech (up 24%).
While the reasons are slightly different they are ultimately driven by the same key thematics that are increasingly determining how tech stocks are valued by the market.
The most fundamental of those thematics is, ironically enough, all about fundamentals.
Just like Tom Cruise, investors are demanding “show me the money”.
The reason that the e-commerce sector performed so well was that most of its major constituents reported strong interim results (to December 2017).
Webjet, Kogan, Jumbo Interactive and Redbubble all reported strong earnings growth. New Zealand’s SLI Systems transitioned into positive EBITDA and Temple and Webster reported a much-reduced loss.
It’s quite probable that the sector is also running on the growing realisation that Amazon’s arrival down will drive an increase in e-commerce’s share of total retailing from the current internationally modest 8 per cent well into double digits.
The software sector boasts numerous companies that have built international client bases that are generating very positive bottom lines.
The language solutions of Appen, the circuit board design software of Altium, the cargo logistics platform of Wisetech, the enterprise content management of Objective and the utilities billing platform of Gentrack have globally unique elements to their IP.
Fintechs show strong earnings
Similarly, fintech features a large number of companies that are strongly earnings-positive and demonstrating solid growth.
They include retail payments and digital lay-by platform provider AfterPay Touch Group, superannuation and investment platform providers HUB24, Netwealth, Bravura, and OneVue, financial planning portfolio and CRM provider Praemium and online share registrar, Computershare.
Another attraction of fintech is that it’s a sector that investors are inevitably a part of and hence can understand and also one that boasts relatively simple business models.
At the other end of spectrum, retail investors continue to flock like bees to honey to early stage companies espousing buzzwords like blockchain, Artificial Intelligence, Internet Of Things or robotics in their ASX releases.
But although these are all undeniably transformative technologies, the market’s patience for signs of at least some revenue traction is shortening.
The valuations of many of these concept stocks still defy logic but reality will come home to roost for those that have poor revenue models, or no product of commercial substance to begin with. A very small fraction of these will turn into real businesses
So the conclusion is… look past the hype and say “show me the money”.
How is the revenue model working, or how will it work and when?
Tim Knapton is the founder and CEO of online tech research and finance marketplace TechVoyage. Its video/financial database and digital broadcast platform provide a more efficient way for investors to appraise listed and unlisted tech companies and for entrepreneurs to finance, acquire and exit them.
Previously Tim was Head of Corporate Broking at Deutsche Australia and before that ran a research department for a leading broking house. Tim has also been a freelance tech/finance journalist for more than 20 years and a columnist with The Australian Financial Review, The Bulletin, BRW, Shares and Australian Business.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.