Expert Tim Knapton reviews the best tech stocks of 2017
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Well it was certainly another very buoyant year for the tech sector in calendar 2017.
The TechVoyage index (of 440 ASX and NZX listed tech stocks) rose by 29 per cent, compared with a coinciding rise of 8 per cent for the All Ordinaries and 23 per cent for NASDAQ.
Not surprisingly, most of the top 20 performers last year were micro caps — or even nano caps.
But more than 20 tech stocks with caps in excess of a billion dollars enjoyed price gains of more than 20 per cent.
Fittingly, if you’ll excuse the pun, the best performing stock overall was MyFiziq — which uses smart phone images to create a 3D avatar of the body for use in fitness, clothing and medical applications.
Among other high flyers, Byte Power Group, Yojee, DigitalX and Ookami, were all propelled by blockchain entry initiatives.
In an apt warning for the speculators, perhaps, Byte Power has since been suspended because of a dispute over 178 million tokens in the company’s crypto wallets.
Of the rest, collaborative supply chain network operator Yojee appears best positioned to benefit commercially from blockchain.
There is no doubt that the distributed ledger capabilities of blockchain are going to have a seismic medium-term impact on how any transactions are recorded and processed.
In a sense, therefore, the addressable market is the size of global GDP — about $US75 trillion ($94 trillion).
Over-supply of spending power
But what use is such an incredibly volatile asset as a store of financial value?
Despite the recent correction, the combined value of tokens on issue from the three largest crypto-exchanges is just shy of $US400 billion, which is equivalent to a third of all US dollars in circulation.
Since there is only scant evidence of cryptocurrency actually being used to settle transactions this is clearly a gigantic over-supply of spending power.
The market’s euphoric reaction to announcements of any kind relating to blockchain defies rational analysis based on fundamentals.
So for example it’s “irrationally exuberant” for ailing and forgotten old tech Eastman Kodak to quadruple over two days based on the mere announcement it was launching an Initial Coin Offer to create a photo-centric cryptocurrency.
When myriads of unsophisticated investors make rapid token (in both senses of the word) profits it always means that when the time’s nigh the value of such speculative assets will fall with similar velocity.
And clearly there is a growing disparity between how unsophisticated and professional investors are valuing tech stocks that drop the right buzzwords, which also include other technologies that will exert transformative effects on the global economy, like AI, IOT, robotics and 3D printing.
Appraise tech on a segment basis
This makes it all the more critical that investors appraise tech on a segment basis.
Last year, understandably, software was the strongest segment, with a gain of more than 70 per cent, followed by fintech (up 39 per cent) and cloud/IT services up 37%.
Coming back down to planet Earth the best performing mid cap was NZX-listed Pushpay whose mobile-enabled, church donations platform is now processing in excess of $US2billion per annum in transactions.
The company has not yet transitioned into positive EBITDA, however, and is trading on very high revenue multiples.
Wisetech Global’s integration of freight forwarding, customs clearance and freight geo-location software is still delivering very high growth at top and bottom lines.
Therefore although the stock is trading on high EBITDA multiples they are not high in comparison with its EBITDA growth momentum, as reflected in what we call our Value Earnings Growth, or VEG Ratio, which divides EBITDA multiple by EBITDA growth.
Other stocks in the list that rate very well on that ratio are salary and leasing software provider Smart Group and data centre operator NextDC.
Afterpay Touch won market favour by integrating Afterpay’s online version of lay-by with Touch’s merchant payments platform, to offer a “pay now, pay later” proposition to retailers.
Funds management and admin platform provider NetWealth doubled in barely a month since its November IPO debut without any significant announcements.
It has an impressive $13 billion in funds under administration but now trades on a prospective EBITDA multiple of more than 50x — which is high even in relation to a robustly valued fintech segment.
NZ-domiciled cloud-based accounting provider Xero was substantially re-rated as it generated interim revenue growth of 37 per cent and finally transitioned into positive EBITDA.
Not only are valuations rising but the tech sector is increasingly volatile.
It’s interesting that 158 of the 440 listed tech companies in our index rose by more than 20 per cent last year while 79 fell by 20 per cent or more.
In other words more than half the stocks in the sector changed by 20 per cent or more.
That makes segment and stock selection all the more critical.
It also means this is a very ripe sector for alpha-driven investors who don’t mind high beta.
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.