Buy Hold Sell: 2 big buys (and why fundies are split on tech's next steps)
After a stellar decade for the dazzling technology sector, these long-duration stocks have fallen back down to earth, taking many an investor's portfolio down with them (this anonymous writer's portfolio included!).
The local tech index is well and truly in a bear market, having sunk nearly 30% since the beginning of the year. The NASDAQ 100 has suffered a similar fate, also falling 30% over the same time period.
But with many stocks down as much as 90% since the start of 2022, is tech now the fertile hunting ground both Growth and Value investors are searching for?
For the last of our sector specials of Buy Hold Sell, it's a Value versus Growth face-off - with Livewire's Ally Selby joined by Investors Mutual's Lucas Goode and Market Matters' James Gerrish for their outlook on the tech sector.
They also analyse three tech darlings - Altium, Megaport and Tyro Payments - and each name their top tech picks for the year ahead.
Note: This episode was filmed on Wednesday 28th September 2022. You can watch the video, listen to the podcast or read an edited transcript below.
Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby and as you all very well know, tech has been one of the worst hit sectors this year with higher interest rates really taking their toll on valuations. But they say you should buy it when there's blood in the streets. So today we're going to figure out if you should do exactly that. We're joined by Lucas Goode from IML and James Gerrish from Market Matters.
The tech index in Australia actually is in a bear market. James, I might start on you. Is it time to be greedy or fearful?
Are fundies greedy or fearful?
James Gerrish: I'm in the greedy camp. I think the tech index is down 40% over the past 12 months. It's been a blood bath as you mentioned. So obviously higher interest rates are a big impediment to higher valuation stocks like tech. I think potentially we're getting closer to a top in bond yields and therefore closer to a low in tech stocks. So be greedy when others are fearful.
Ally Selby: Amazing. Over to you, Lucas. Are you greedy or fearful right now?
Lucas Goode: Oh, I'd say probably more balanced. I mean, it really depends on the companies we're talking about. I think the profitless tech story, that boom's really died out, but there's still a lot of froth in some pockets of the market, we think. So we're hedging our bets a little bit and picking quality companies that have got valuations supported by cash flows.
Valuation trends in tech
Ally Selby: Staying with you, I want to know if there are any interesting trends that you've witnessed in terms of valuation in that sector?
Lucas Goode: Well, I think you've clearly seen a flight to quality within tech. Companies with proven business models, profitability, and strong competitive positions like Altium and WiseTech have held up really well. Whereas some of those perpetually cash-burning and money-raising companies, they've really found it tough and I think will continue to do so.
Could we see a rotation into growth stocks
Ally Selby: You kind of mentioned it earlier that you feel like we could see a rotation into growth stocks. Can you take us through that a little bit more?
James Gerrish: Yeah. As I mentioned, higher interest rates have been an incredible headwind to that space. I mean the three-year bond yield has gone from 30 bps, we're now at 370 bps. So that's a huge tectonic shift in the macro environment. To Lucas' point, I completely agree around the focus needs to be on quality. You've seen as times get tougher, as economic conditions deteriorate, those companies that continue to grow and continue to satisfy their customers, and seeing customers spend more through those periods is a really good sign that they're onto something that's a quality business. Whereas those companies that have been tested and fallen by the wayside become obvious.
Altium (ASX: ALU)
Ally Selby: Okay, let's get into some of the stocks. First up, we have Altium. It surprised investors with some great guidance and an impressive result in August. James staying with you, is it a buy, hold or sell?
James Gerrish (BUY): Yeah, it's definitely a buy for us, Ally, and we do own this stock. You touched on the recent result and the guidance around the forward-looking momentum in the business is really sound. So we like it, we've got a buy in it.
Ally Selby: Not a lot of companies posted guidance. That's a good thing. Over to you Lucas, is it a buy, hold or sell?
Lucas Goode (SELL): Look, it's a sell for us purely on valuation grounds. We do think it's a good business with a strong position in that mid-market, but I guess there are a couple of things that concern us with Altium. Number one, Octopart has driven the majority of the revenue growth last year, which is not actually a software business and has been a real beneficiary of the supply chain problems that we've seen over the last couple of years. Also, we think there's been a real change in effort in emphasis from the company away from adding more subscribers to generating more money from existing subscribers. This is not necessarily a bad thing, but to us, it just suggests that maybe the addressable market isn't big enough to support a 50 times earnings valuation on the stock.
Megaport (ASX: MP1)
Ally Selby: Okay. Next up we have Megaport. Brokers seem to be absolutely loving this stock at the moment. Over to you, Lucas. Is it a buy, hold or sell?
Lucas Goode (SELL): Look, we're value investors. We don't believe in revenue multiple so it's a sell for us. We're not going to pay up for profitless growth and I think with Megaport they've got a really interesting product, but it's one that while it should have really high incremental margins, they've really struggled to generate the returns that you would expect because it's actually a very difficult sales cycle. This is why we see them try to branch out into using SD-WAN providers as resellers to going through third parties and they've really struggled to get there and I think both the market and the company have maybe underestimated how difficult that is. So it's a sell for us.
Ally Selby: It's been a really poor performer this year. It's down 60%. James, over to you. Is it a buy, hold or sell?
James Gerrish (BUY): I'm going the other side. I've got it on a buy here. Lucas made some very good points about the growth and the challenges that it has had. I guess our thesis is that's now captured in the price. So it's fallen from $22 down to around $7 at the moment. That's a very big decline. Obviously, they've had to refocus on how they sell their product. They had some issues with the level of growth they were achieving. I think they've addressed that. They're providing a little bit more clarity and information to the market and I think that's a positive. So from a risk rewards perspective, I think it's a buy down here around that $7.50 mark.
Tyro Payments (ASX: TYR)
Ally Selby: Okay. The last stock of today is Tyro Payments. Mike Cannon-Brookes actually recently made a bid for the company but was rejected. Last one for you, James. Is it a buy, hold or sell?
James Gerrish (HOLD): Yeah, it's a hold for us. I think notwithstanding corporate activity that's playing out and this could continue to play out, it's trading around that bid level at the moment. From a business point of view, they've got a really good market position, but they've got ageing hardware that needs replacing. So you've got the thesis around cost out, but then they've got to go and spend a lot on this ageing hardware. So it's a hold for me.
Ally Selby: Its share price is down 56% year to date. Over to you Lucas, is it a buy, hold or sell?
Lucas Goode (SELL): Sorry to be a Debbie Downer, but it's a hat trick of sells from me. Grok has obviously put the company in play, but it's trading above the bid price and we see quite a bit of downside risk if a bid doesn't come through. We're not particularly positive about the company itself. I think it's a really competitive space, payments, so any market share gains, the operating leverage you're seeing is gobbled up with pressure on fees. I guess I'd liken it to being the MiniDisc of payments, right? It's superior to what came before. It's better than EFTPOS or cassettes, but it seems like it's already been superseded by better technology. So that's a sell from us.
Symbio Holdings (ASX: SYM)
Ally Selby: Okay. As you mentioned there, you've been a bit of a Debbie Downer in this episode. So I'm going to push you to name a stock that you're actually buying right now. A tech stock that you love. What have you brought for us today?
Lucas Goode (BUY): So one key buy for us in the portfolio in the tech sector is Symbio, which is a company that not everyone may have heard of because it's not consumer-facing. But actually, we all interact with their software every day.
If you call your Uber driver because you're wondering why he's driving in the wrong direction, that virtual phone number in the related software is all run by Symbio. If you click to call a restaurant to make a reservation or if you dial into a Teams call on your phone, that all runs on Symbio. So a lot of use cases.
Compounding recurring gross margin within the wholesale business at 20%. It's founder-led, it's profitable. We think just purely the domestic business is significantly more valuable than the current share price implies, but the real upside is in the Asian expansion. They're now live in Singapore, expanding into Malaysia next year, and the opportunity there is huge because those use cases I mentioned, you can't even do those in those countries because the legacy telcos have a stranglehold on the infrastructure. So we think there are massive opportunities for Symbio and it's a conviction buy for us.
Snowflake (NASDAQ: SNOW)
Ally Selby: Okay. Over to you James. Your time in the hot seat. Can you beat Symbio? What's your stock for us?
James Gerrish (BUY): I'm going to pitch something that's totally different. That's all about growth and all about a revenue multiple. It was one of the hottest IPOs back in 2020 over in the US market. Listed at US$120 a share, went to US$400 a share. It's now back to US$165 a share. The company is Snowflake. It's all about data and getting information and context around data and we know how important that is to a huge range of companies from small like ours to large multinationals. So Snowflake, around US$165 a share.
Ally Selby: Okay, well I absolutely loved that episode and I hope you did too. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.
What's your top tech pick?
Gerrish has looked offshore for his favourite tech opportunity - Snowflake, while local legend Symbio has caught Goode's attention. But we would love to know what you think. Let us know your favourite tech stock in the comments section below.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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