Expert stock picks ‘still resilient’ despite sharemarket tech rout

The expert picks made at the Sohn Hearts and Minds conference would have cost their investors millions – but the fund managers are standing by their choices six months on.

The expert stock picks made at Australia‘s leading investor summit, the Sohn Hearts and Minds conference in December, now read like a ’who’s who’ of struggling tech stocks as investors cash out of a sector that’s gone cold. Picture: AFP

The expert stock picks made at Australia’s leading investor summit, the Sohn Hearts and Minds conference in December, now read like a “who’s who” of struggling tech stocks as investors cash out of a sector that has gone cold. Spotify is down 63 per cent over the past six months, Delivery Hero is down 67.2 per cent, and internet infrastructure provider Megaport down 58.8 per cent, with tech stocks battered by a Covid comedown. Other blue chip tech stocks are in free fall; Zoom has fallen 70 per cent in the past year, while Netflix has lost 70 per cent in six months.

At the December conference, TDM Growth Partners’ Hamish Corlett decided to double down on Spotify, his 2019 pick, declaring the company had a pole position in the audio market. Firetrail’s Eleanor Swanson called Megaport one of the best stories on the sharemarket because it had brought the telco sector in to the 21st century.

Tekne Capital Management’s Beeneet Kothari picked global restaurant delivery group Delivery Hero based on its valuation, and said the stock was trading at a discount to peers including DoorDash and China delivery service Meituan.

Each of the chosen companies have had tens of millions of dollars wiped from their valuations.

Beeneet Kothari, CEO and portfolio manager at Tekne Capital Management.

Six months on, Mr Kothari stands by his pick, and the overall strength of the tech sector.

“These are businesses where the fundamentals are not broken. They have a broken stock, not a broken business,” he said.

“And now you’re able to buy a number of them at 15 or 20 times earnings.”

Of Delivery Hero specifically, Mr Kothari said the business had not changed materially since he pitched it in November, despite the share price since falling by about 68 per cent in six months.

“This is the largest delivery company in the world,” he said.

“They’re at an amazing scale, they’re in more than 50 countries around the world, and the bet that we had made is that the company is transitioning from an investment phase to a profit harvesting phase. When we punch the numbers into our model, what the profits look like relative to where the company was valued by the market, we felt that you had an opportunity to make a ton of money. I would say that that largely holds true today.”

He said investors should never have assumed that 2020 growth rates for the so-called Covid tech stocks such as Netflix, Amazon and Zoom would continue.

“The right way to look at these businesses is you have to smooth out Covid,” he said.

“What happened in 2020 and 2021 was always partially going to get reversed. I think people would be making the same mistake the other way, assuming that Amazon’s revenues will now forever decline … Over two or three years, Amazon is still growing at 30 per cent and the same thing for food delivery companies including Delivery Hero.”

Josh Gilbert, analyst at global stock and crypto-trading company eToro, said many investors had been moving on from the “Covid tech” stocks for some time. He blamed executives of those companies for lacking vision.

“One of the core reasons why many investors are losing faith in these stocks is the fact that we haven’t seen any clear direction from management teams,” he said. “That’s especially the case from ‘work from home’ names such as Peloton, Zoom and Netflix. And as a result it’s difficult for many investors to see how these companies can reinvent themselves in this current environment and see beyond the losses most Covid ‘winning’ stocks have experienced.”

Contrarian buy opportunities were therefore starting to arise for savvy investors, Mr Gilbert said.

“If we take Netflix as an example, its share price is now only 30 per cent higher than it was five years ago,” he said. “Despite this, in that time, the company has doubled its subscriber base, tripled its revenue and increased its net income by over 500 per cent.

“Instead, investors are choosing to focus on Big Tech stocks with enormous balance sheets that continue to excel quarter after quarter and offer resilience in market downturns.”

Des Hang, the chief executive and co-founder of Australia‘s ‘Netflix for cars’ Carbar, said that the likes of Netflix, Spotify and Zoom all enjoyed unprecedented growth amid the pandemic and that growth was always unsustainable.

“The growth we saw makes sense, these are platforms that people went from using a few times a week to at least once a day, adding more value to people’s lives in the process,” he said. “Their current situation could be seen as a bit of a rebalancing, given the world is now normalising.”

Contrary to Mr Gilbert’s predictions, Mr Hang cautioned against underestimating these companies’ executives and their ability to reinvent themselves, given companies like Netflix and Spotify were founded to challenge the status quo.

“It’s easy to forget that Netflix, for instance, used to be best known as a mail-order DVD company, not a streaming business. They saw an opportunity to innovate, disrupt and evolve their organisation and they took it,” he said. ”Netflix has been hugely influential for car subscriptions, and as a participant in the sector we’re keen to see what they will do next.”

Share prices will ultimately follow fundamentals over the long run, according to Mr Kothari.

“Over the short run any number of things could happen, but over the long run the fundamentals will be the only thing that matters. And if we have seen the peak of inflation then it‘s very likely we’ve seen the trough in technology companies.”