The bursting of the tech bubble

Mawhinney, a seasoned investor, railed against Afterpay’s share price when it eclipsed $100 in 2020, months before it peaked, and questioned the sanity market to drive up the price.

Anton Tagliaferro, founder and chief investment officer of Investors Mutual, one of Australia’s best-known value investors, echoed that sentiment. It marked the moment when buy now, pay later darling’s share price hit triple digits wondering if the market was “pricing fundamentals correctly.”

People like Mawhinney and Tagliaferro were dismissed as out of touch for not joining technological triumphalism. Their performance suffered as they put their faith in old-fashioned industrial stocks like Brambles, Amcor and Orica and underprivileged oil companies like Woodside.

Today, the dramatic drop in tech stocks has validated their skepticism while growth funds that previously outperformed them struggle.

Many investors mistakenly see tech stocks as “some kind of holy grail,” Tagliaferro says, rather than seeing them as “just another sector of the market.”

“Yes, there have been dramatic winners, as there have been in mining stocks, but for every success, for every Facebook, there will be many who will not come out on top.”

Simon Mawhinney, chief investment officer of Allan Gray, remains skeptical of tech stocks despite the fall. Renee Nowytarger

So how did the stocks of tech companies that have come to represent a wave of disruption and innovation stumble so quickly and what happens from there?

If there can be a single factor that can claim responsibility, it must be when the illusion of endless free money came to an end.

“As you approach the speed of light, the laws of Newtonian physics break down,” says Chris Tynan, investment analyst for DNR Capital, a Brisbane-based fund manager.

“As you approach zero nominal interest rates, the laws of valuation break down. This is why you have seen companies trade 50 times their sales and these cryptocurrencies come and go. It just didn’t make sense.

Now inflation has changed the game. Central banks are reacting aggressively to rapidly rising consumer prices with higher interest rates, forcing investors to rethink the value of future earnings in the tech complex.

“When the Fed said it would do anything to get inflation under control, that’s when things really started to move,” Younes says.

Rising rates are devastating tech stocks because investors are slashing the present value of future earnings, hitting the market value of not-for-profit companies or so-called concept stocks hard.

Higher interest rates also increase the cost of capital, adding an additional burden to businesses that depend on borrowed money to stay afloat.

“If you’re burning through cash and all the profits you’re making are more than five years away, you’ve been hit hard,” says Tynan.

“What’s much more valuable are companies generating cash now, and that’s in the form of energy and resource stocks.”

Anton Tagliaferro, founder and chief investment officer of Investors Mutual, said valuations of technology companies have decoupled from fundamentals. Dominique Lorrimer

Yet the technological sinking is not limited to higher interest rates. US mega-cap stocks like Amazon, Netflix and Meta are highly profitable and therefore less sensitive to interest rate fluctuations. But they too were surrounded.

“Most of the growth in their valuations [during 2020 and 2021] was actually profit growth,” says Tynan, which he attributes to an “advance in digitalization” during the early stages of the pandemic.

“What’s happening for them now is that there’s actually a slowdown in earnings. They’re less exposed to interest rates, but there’s a significant slowdown in earnings.

In March, portfolio managers at T. Rowe Price, one of the world’s largest money managers and a long-time investor in growth companies, spoke with Amazon executives.

“They were quite confident that volumes and trade would pick up,” says Sam Ruiz, a Sydney-based investment specialist for the fund giant, before an abrupt change in tone at a two-month follow-up meeting. later.

“Within six or seven weeks, they told us that everything had changed. Now all of a sudden they’ve oversized their logistics and warehousing footprint and they’re overstaffed.

Similar dynamics have altered the growth ambitions of tech companies, triggering a wave of layoffs and hiring freezes at Netflix, Meta, Twitter and Amazon.

“It’s amazing how a 50 to 75 basis point hike by the Fed is already creating a sell-off in demand that is already impacting margins,” Ruiz said.

The combination of the degraded environment and plummeting valuations means these once high-flying tech stocks are crashing, weighing on the broader market. But not everyone believes it’s time to ditch the technology.

“If you’re a long-term investor and are prepared to handle short-term volatility, I think now is a great time to invest,” says Thomas Rice, portfolio manager of the Perpetual Global Innovation Share Fund.

Rice’s largest position is in US online residential real estate company Opendoor Technologies, which has halved in value this year. He says the business was unfairly taken in the sale.

He also has an eye on enterprise software companies like Microsoft, ServiceNow, Salesforce and MongoDB, which have become more attractive after declines this year.

Managers of global innovation and disruption fund Holon Photon, which owns names like Coinbase and Tesla, are just as bullish on large-cap tech stocks as they were two years ago.

“The opportunity now lies in a lot of big tech titles,” says Holon’s director of research, Tim Davies. “Now is the opportunity to do the work to say ‘I want to buy’.”

The fund added a position in Meta and bought in Netflix after shares fell sharply in April, in addition to loading into Alibaba and Tencent, two Chinese tech giants that sank last year.

Cathie Wood, the queen of tech bulls who runs innovation fund ARK, has also doubled down on tech despite the value of her portfolio holdings collapsing this year.

Cathie Wood, founder of Ark Invest, remains bullish on tech stocks. Sam Moy

On Thursday, Wood told attendees at the Morgan Stanley conference in Sydney that “we are on the threshold of the most explosive age of innovation in the history of the worldand that the mojo would eventually shift back to tech stocks like Zoom, Tesla and Roku, which are among his fund’s biggest holdings.

For others, however, the skepticism hanging over tech stocks will persist amid tighter financial conditions and the threat of recession looming over the global economy.

“There’s undeniable value there, but I don’t think it’s among companies that capture the hearts and minds of ordinary people,” says Simon Mawhinney of Allan Gray.

“Take BNPL, they haven’t made any money at the best of times. How the hell are they going to make money in the worst of times? »

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