Tech stocks suffer worst single-day losses as bloodbath continues: Macquarie

Investors can expect a long and painful market reset, Macquarie says, with technology stocks suffering their worst single-day losses since early in the pandemic.

Richard White, WiseTech Global, Anthony Eisen, Afterpay, Chris Vonwiller, Appen, Aram Mirkazemi, Altium and Kirsty Godfrey-Billy from Xero. Picture: John Feder/The Australian.

Australian tech investors can expect a long and painful market reset, amid a bloodletting that has sent the valuations of former market darlings Altium, Appen, Block and WiseTech spiralling and wiped billions from the market.

Technology stocks were savaged on Thursday and have suffered their worst single-day losses since early in the pandemic.

The ASZX tech sector was down 7.1 per cent at noon, with Xero down 12.1 per cent to a two-year low and Block down 15.1 per cent.

Researchers from Macquarie analysing the health of the local tech sector found that software company valuations are still trading at a 33 per cent premium compared to 2010 to 2015 – and at a 100 per cent premium compared to a decade prior – and will likely plunge further still.

The current upheaval can be compared to the dotcom boom and bust of the late 1990s and early 2000s, the researchers note, given that period was characterised by record low interest rates and rampant interest in technology companies allowing capital to flow freely, including to start-up companies that had no track record of success.

“Valuations rose and money eventually dried up. This led companies, some of which didn’t even have a business plan or product, to collapse, causing the market to crash,” the researchers wrote.

“In the current cycle, it could be argued that more companies have business models that are revenue-generating and thus the overall environment is more robust. We would remain cautious, as the revenue generation has been driven by even larger customer acquisition costs that may not ultimately drive investor confidence in companies’ ability to generate free cash flow, which could lead to a similar market correction.”

Aram Mirkazemi

Comparing the early 2000s to now, the S&P IT index fell a further 56 per cent and 19 months before reaching trough levels, which would be December 2023 in today’s terms.

Since the global financial crisis Australian-listed technology companies have been trading at a premium to the S&P500 IT index, according to the research, while prior to the GFC US-listed companies were trading at a higher multiple.

This could be because during the GFC, Australia fared relatively better than the US, leveraging off China’s stimulus which focused on infrastructure, and boosted demand for Australian commodities, the researchers say.

There are also fewer companies in the Australian tech space, and these command a scarcity/TINA (there is no alternative) premium.

Of the ASX300 tech companies, engineering software maker Altium has the most downside, according to Macquarie.

“Though most companies have started to trade below their own historical average forward multiples, two-thirds are still trading above the historical average of ASX300 I.T. average,” the researchers note.

“In this environment, we continue to prefer names with defensive characteristics and that are generating (or close with a clear path) to positive free cash flow.

“We have Outperform recommendations on Megaport and NextDC. WiseTech (Neutral) also has a strong balance sheet... and is generating positive free cash flows.”