Tech sell-off a window of opportunity to buy in at attractive prices
Here’s three reasons the technology stocks sell-off is an opportunity for investors.
There is no doubt that tech investors have had a tough time recently. Technology stocks have slumped in reaction to the surge in US 10-year bond yields towards 1.75 per cent in April, triggered by fears of a shift in central bank policy towards raising interest rates.
While ‘‘mega caps’’ such as Google, Microsoft and Amazon have proven relatively resilient given the strength of their balance sheet and global dominance, emerging technology leaders such as Afterpay and Tesla have sold off more aggressively as investors lock in profits after strong share price gains in 2020.
Continued bouts of profit taking following a stellar 2020 performance has left the technology indices in the US and in Australia with little gain so far in 2021.
Many technology stocks have now fallen by 30 per cent or more this year, and many investors are now wondering if a major correction in tech companies will continue for the remainder of the year. But rather than flee tech, the recent sell-off actually offers investors a window of opportunity.
The world’s leading innovators offer investors strong long-term earnings growth over the next decade as their investments in new technologies, including blockchain, digital money, cloud storage, artificial intelligence and autonomous transportation, become more widely adopted globally.
There are three key reasons why investors should buy back into technology stocks at attractive prices:
Post-Covid profit power
Technology stocks reported strong results across the board during the recent Q1 2021 US reporting season. Google (Alphabet) for example, reported a 162 per cent rise in Q1 earnings, while reported earnings per share (EPS) growth surged 162 per cent over the last 12 months.
A local Australian company that continues to baffle local analysts is Afterpay, which recently reported stellar sales growth in the US and Britain of 211 per cent and 277 per cent respectively. After a stellar 2020 share price performance, Afterpay has seen heavy profit-taking since March 2021.
Afterpay, which offers younger consumers a payment alternative to traditional credit card options, is still at the start of its exponential adoption curve. Buy now, pay later service penetration reached 20 per cent and 38 per cent of the British and US populations respectively in 2020.
It’s clear that Afterpay’s offering can deliver robust earnings growth over the long term as it builds market share in retail markets much larger than its Australian base.
Tech stocks will be the long-term winners
Despite this Covid-19 dividend achieved by tech stocks, investors have been buying ‘‘old world’’ value stocks. These investors believe that ‘‘value’’ stocks offer a safer investment with technology in a ‘‘bubble’’ and global inflation fears rising.
But the safest way to generate sustainable, long-term returns is to invest in companies that consistently generate long-term earnings growth.
That means identifying companies that operate with long-term structural tailwinds, such as rising cloud adoption, digital payments, and Web 3.0 innovation. Then the investor must identify the unique value proposition that each company offers to consumers. For example, Coinbase (one of our recent investments), offers a strong value proposition for companies using its digital infrastructure to develop Web 3.0 applications that are regulatory-compliant in an institutional-grade custody environment.
By contrast, old world business models face significant headwinds given their generally poor balance sheets, which means they often don’t have enough funds to invest in the digital infrastructure needed to compete effectively in the digital global economy.
Uncertainty also remains high among traditional old-world names, particularly with rising interest rates that will require higher interest payments on big debt levels that will hurt earnings.
Valuations look attractive following recent sell-off
Following the tech sell-off over the past few months, we see substantial long-term price appreciation and investment value for investors.
Take Apple for example.
It currently trades at 18 times 2021 PE multiple (ex cash), a similar valuation to each of Australia’s big four banks.
Apple is extremely well placed as a leading global innovator, and is likely to maintain over 25 per cent annual sales and profit growth over the next decade. With $163bn of net cash, it has the immense balance sheet strength needed to fund new innovation opportunities in blockchain, AI, digital payments, digital health and education.
Apple shares doubled within six months of the Covid-19 March 2020 lows.
Apple’s share price has however consolidated since September 2020.
Strong continued earnings results and a possible announcement of its plans with digital payments (cryptocurrencies) are likely catalysts for a strong share price breakout in 2021.
Tim Davies is director of research at Holon Global Investments.
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