Afterpay tops 2020 tech surge as concerns remain

Could rising debt levels and high expectations of the tech darlings lead to investor disappointment?

Afterpay managing director Nick Molnar is Australia’s youngest self-made billionaire thanks to its 2020 success. Picture: David Geraghty/The Australian.

Australian technology stocks have had a fairy-tale run in an unprecedented sharemarket trading year, but there might be no happy endings for investors, some experts warn.

Market darling Afterpay, the nation’s buy now, pay later sector leader, closed 2020 more than 300 per cent stronger, at $118, despite a deep-dive to around $9 in March.

Recent billionaires and co-founders Nick Molnar and Anthony Eisen went public with their deferred pay platform for shoppers in 2017, but the surge in e-commerce transactions during the pandemic has pushed its value to nearly $34bn – more than that of Coles at $25bn or Woodside at $22bn.

Afterpay is not alone, fellow consumer shopping-focused fintech stocks Sezzle (up 195 per cent), Zip (49 per cent) and Splitit (96 per cent) also soared in price and valuation in the past 12 months.

Anthony Eisen and Nick Molnar, co-founders of ASX market darling Afterpay.

Further afield, software technology business Xero’s share price grew by 84 per cent to $146.82, while online retailer Kogan has gained 150 per cent to $19.

The stratospheric rise is concerning for some market experts and long-time investors.

“We just can’t get our head around some of the valuations,” said Argo Investments’ chief executive Jason Beddow.

With 95,000 shareholders, listed equities investor Argo has 89 companies in its portfolio, mostly dividend-paying companies.

Argo Investments CEO Jason Beddow

Mr Beddow said he was focused on the long-term opportunities linked to 2020’s “market laggards” rather than short-term gains on tech stocks.

“Global markets have shifted significantly towards technology stocks as seen in performance of the US tech stocks and the S&P/ASX All Technology Index in Australia.

“Investors’ attraction to this growth is evident, but we question whether the shift in corporate profits to this sector justifies the rapid multiple expansion the technology sector has seen.

“We do consider a number of the Australian technology companies to be very good quality, well managed businesses with strong growth outlooks, however we struggle to justify the valuations placed on some of them. 

“In the case of Xero for instance, the earnings expectations are not different to what they were 12 months ago.

“So it’s more consumer expectations and investor sentiment driving that share price growth rather than an earnings upside.

“For us, it’s about cashflow, earnings and returns. Xero is a good company, but I am not sure it’s worth $147 per share.”

Xero founder and director Rod Drury gave himself some Christmas cheer, selling close to two million shares for $240m in December. He still holds about 8 per cent.

He said market conditions, including the low cost of borrowing and a potentially extended period of low interest rates, supported Afterpay’s rise.

“But Afterpay is not so much a tech company, it’s a lender with a technology platform.

“Its high debt levels (to grow the business) could be an issue once the economy recovers and interest rates get back to normal over the long term, which is what we focus on.”

Super fund investment experts are also cautious on their long-term outlook for tech stocks with investment diversification across assets a strong focus.

“We are seeing excessive valuations, a lot of promises and not too much profit around in tech stocks,” said Statewide Super’s chief investment officer Con Michalakis.

Statewide Super chief investment officer Con Michalakis. Picture: Keryn Stevens

“Investors are paying a lot for disruption, but much of it is simply going to be about disrupting their own funds.

“The glamour stocks have got all the attention due to latent demand, but they will need to prove their worth over the long term.

“Valuations, debts and expectations are all very high across, fintech, AI, cyber security and software businesses, a market situation that is set up to disappoint investors.

“It’s looking like the market’s up for some corrections.”

Statewide Super has 143,000 members and more than $9.8bn in funds under management.

The S&P/All Tech Index (XTX) has 69 companies with a total market capitalisation of more than $170bn.