Local fund managers split on tech stocks sell-off, send warning to IPO hopefuls

Fund managers are split on whether a sharp sell-off of ASX-listed technology stocks has ended, warning IPO hopefuls will find it much harder to list successfully.

Fund managers are urging caution following the broadbased selldown in tech stocks. Picture: AFP

Local fund managers are split on whether a sharp sell-off of ASX-listed technology stocks since the start of the year has ended, warning IPO hopefuls will find it much harder to list successfully.

A surge in customers during the Covid-19 pandemic had also led to questions about the sustainability of some unprofitable companies, and whether there would be slower growth in future, said Steve Johnson of Forager Funds.

The S&P/ASX All Technology Index – which tracks the performance of the listed tech sector – has fallen over 16 per cent since the start of the year, following similar moves in the US.

The tech-heavy Nasdaq closed out January down 9 per cent, a similar rout to January 2008, when it fell 9.9 per cent.

Late last week, investors wiped more than $280bn from the valuation of Facebook operator Meta after the company warned it was losing users to TikTok. But Amazon recorded its best one-day gain since 2015 after it said there had been a spike in Prime members.

While the sell-off was sparked by expectations of a rise in interest rates, scrutiny in the sector is now focused on the sustainability of high-growth companies, Mr Johnson said. “For the first time people are asking questions about whether Covid has brought forward an acceleration in demand that will mean slower growth in the future, or whether we’re closer to the point of saturation,” he said.

“That’s true across a number of different areas, including the migration to the cloud, and advertising shifting online. We also saw it with Facebook’s results.”

Mr Johnson said that despite the sell-off, there remained “plenty of examples of businesses trading at crazy valuations”, although there were opportunities in small-caps.

“I’d put (sales software firm) Bigtincan into that category; we have a decent investment in that now,” he said.

“We also own Whispir, and I think that’s a good example of valuations really hitting attractive levels, because its share price is up since the start of January.”

But Paul Xiradis of Ausbil Investment Management is more optimistic, saying plenty of good quality companies have been caught up in the selling.

“There’s always good quality companies that are sold down just because the sector has been,” Mr Xiradis told The Australian.

“People don’t look at the underlying businesses or the quality of the businesses. We see value creeping in at the moment, and yes, there’ll be companies that are not profitable and will never be profitable and so will continue to fall, but there are other companies that now look interesting after some pretty messy moves.”

CommSec chief economist Craig James said investors were trying to work out which stocks would do well in the post-pandemic, higher rate environment.

“Investors are getting their heads around which stocks are going to be the winners and which are going to be the losers … what we saw was the stay-at-home tech stocks were the favourites but now we’re moving into a living-with-Covid environment and investors are moving away from technology and into other parts of the market,” Mr James said.

“Amazon continues to do well, though it’s quite amazing when you get a stock falling almost 8 per cent one day and then rebounding 13.5 per cent the next day. It’s just stupid moves, really,” he said.

“There’s a lot of seasoned veterans looking at the markets and rubbing their eyes. It just doesn’t make sense to be moving so much one day and then back the other direction the next day.”

Tribeca Investment Partners portfolio manager Jun Bei Liu said she was seeing “plenty of bargains” following the selldown. The worst of the rout was probably over, she added.

“We see plenty of bargains across some of those growth and expensive companies like tech or healthcare. And we do think the road ahead does look better for these companies.

“But the tech pullback has hit some more than the others because they are Covid beneficiaries and their earnings have fallen a lot,” she said. “For those companies, such as e-commerce businesses, it is a little bit challenging to see the road ahead, just because over the next 12 months it’s very likely that earnings will continue to rebase. It may well be that the valuation is reasonable, but the earnings will continue to fall as the economy opens up.”

Xero was “a pretty good buying opportunity” and WiseTech Global was interesting, she said.

Mr Johnson disagreed. WiseTech still looked overvalued, even after its 27 per cent drop this year, he said, as did Megaport, despite a 30 per cent fall.

“Megaport, on 20 times revenue, that’s just a very, very, very optimistic valuation. Wisetech too … We could have a lot of our portfolio invested in this space, but I don’t want to do that until I see widespread distress.”

The outlook had suddenly become much more challenging for companies in the sector considering a float, Ms Liu warned.

“IPO timelines will have to be pushed out,” she said. “We’ve seen some very expensive tech stocks debut recently that have performed very poorly and that doesn’t bode well for the sector.”

Venture capitalists would be reluctant to list companies in the current environment, Mr Johnson said. “I think activity in that space will be dramatically curtailed. The other thing that I think it curtails is their ability to raise and burn a lot of cash,” he said.

But Rachael Neumann, a partner of the venture capital firm Flying Fox, said volatility in tech stocks had not trickled down to early stage start-up valuations.

“Valuations are in a steady climb over the past 12 months and don’t seem to be directly correlated to the stockmarket at this time,” she said. “It might be hard to predict whether you have a winner … but they’re not volatile like stocks are.”