Tech Split Into ‘earners And Burners As Investors Hunt Value

Speaking to the Australian Financial Review, Dean Price, portfolio manager at Washington H. Soul Pattinson, said there is a divide in technology companies between some fundamentally sound, albeit still unprofitable, companies and those whose businesses are less stable. Models.

“ASX was a close venture capital exchange,” Price said. “It is aimed at all early-stage mining and technology companies and was conducted at a time when Australia had not had a venture capital market for decades.

"These companies will scream cheap, but on a deeper level, you think they'll be gone in five years."

"Salary and Vodka"

The split was also shaped by former longtime Pie Funds portfolio manager Chris Bainbridge, who formed a new company, Discovery Funds Management.

"History is divided into earners and drinkers," he said. “We believe this correction is one of the best things that could have happened to a number of tech companies as it imposes financial discipline not seen in recent years.

“There are now undervalued companies that clearly have better earnings than anyone expected six months ago, and that's what the market is missing.

“The concern is that you have to find the right materials. You will not be able to purchase the Index."

According to Fundis, WiseTech was rightly recognized by Richard White.

Bainbridge was interested in companies he believed were market leaders or had potential, such as Life360. But he said all companies should be able to lead the way down.

“The most important thing you can do well is be a market leader. Some of the best updates of the earnings season have come from tech companies that are undisputed leaders in their fields, like Altium and WiseTech, and have been rightly rewarded,” he said.

“Take Audinate for example, they are also a market leader and continue to burn cash, but they have fantastic price growth and sustained gross margins in a tough market. So investors are backing them to keep investing . »

Rival Adobe Acrobat Nitro, which fell 53% before announcing last week that it had turned down a $1 per share offer from a consortium of Potentia Capital and HarbourVest, was one stock that came under fire. of a massive sell-off by investors this year. $53. Employee.

Foolishly Optimistic / Foolishly Pessimistic

Forager Funds Management owns 1.5% of Nitro and its chief investment officer, Steve Johnson, said the company is an example of a company worth much more than its market capitalization suggests, suggesting it is still worth at least minus $. funds.

“A market that puts these things above profit has become an obsession with profitability. It was stupidly optimistic and now it's stupidly pessimistic,” he said.

“You have to focus more on generating income and cash flow than it has been so far, but I think American retail investors and even American stock markets think this is the best solution ; You need to break it down and subtract the cost of growth. ".

Potentia Consortium's bid for Nitro comes after San Francisco-based PE software fund Thoma Bravo bid on Nearmap and received board support for its $1.1 billion bid . Infomedia was also caught "scamming" TA Associates in May.

Dean Fergie of Cyan Investment Management said PE's recent interest in ASX-listed tech companies showed there was value.

“Stocks are only worth what people are willing to pay, but recent offerings … have decent rewards, so there's no question some stocks have been sold,” he said.

“I hope the current activity will continue. There is no doubt that corporate teams around the world will be scouring these companies to find those that have open books, are cash-strapped, have a strong customer base and revenue. trading below the break-even point".

Big expenses

Although Fergie is optimistic about healthcare software provider Alcidion, he said other companies like Dubber and PointsBet are still overspending.

Losing tech companies that may need to go public in the next 12 months to raise more money include Big Tin Can, whose cash flow is 30 years old. completed and ended the last 12-month period with just $12.9 million in cash in the bank, but recorded over $93 million in operating expenses for the year.

"The fear has subsided since May and June, but many companies are still issuing money," Fergie said.

"The investment community as a whole won't be too optimistic about technology...in the next two or three years. After four years, people forget about risk...Investors have long but not infinite memories ."

Mr Price, who has been hesitant to buy tech stocks since the start of the year, said some publicly traded tech companies were "still living in a kind of denial". He pointed to a wave of layoffs and other cost-cutting measures in small tech stocks, similar to tech startups.

“You could easily argue that some of these names could go up a lot and still be a bit more expensive,” he said.

But he doesn't think falling tech valuations represent a long-term shift in how investors view business or value growth.

“I don't think [this solution] is structural or permanent. The notes flow. “If you change your assumptions about a number of things, valuations will change,” Price said.

Warren Buffett. Big problem with dividend investing