Buy, Hold, Sell: Two Big Buys (and Why Funds Are Divided on Tech’s Next Steps)

Lucas Good: Oh, I would say probably more balanced. I mean, it really depends on the companies we’re talking about. I think the non-profit tech story, that boom is really dead, but there’s still a lot of foam in some pockets of the market, we think. So we’re hedging our bets a bit and picking quality companies with valuations that are supported by cash flow.

Valuation Trends in Technology

Ally Selby: To stay with you, I want to know if there are any interesting trends that you have witnessed in terms of valuation in this sector?

Lucas Good: Well, I think you clearly saw a flight to quality within technology. Companies with proven business models, profitability and strong competitive positions like Altium and WiseTech have held up very well. While some of these companies that are constantly burning and raising money, they have really found it difficult, and I think they will continue to do so.

Could we see a rotation towards growth stocks

Ally Selby: You kind of mentioned earlier that you think we might see a rotation into growth stocks. Can you tell us a bit more?

James Gerrish: Yeah. As I mentioned, higher interest rates have been an incredible headwind in this space. I mean the yield on the three-year bond went up 30 basis points, we’re now at 370 basis points. So it’s a huge tectonic shift in the macro environment.

For Lucas, I completely agree that the focus should be on quality. You’ve seen times get tougher, economic conditions get worse, these businesses that continue to grow and keep their customers happy, and seeing customers spend more during those times is a really good sign that they’re onto something that is a quality company. As companies that have been tested and left behind become apparent.

Ally Selby: Alright, let us get into some of the stocks. First, we have Altium. He surprised investors with excellent advice and an impressive result in August. James is staying with you, is it a buy, hold or sell?

James Gerrish (BUY): Yeah, that’s definitely a buy for us, Ally, and we own that stock. You mentioned the recent bottom line and the advice regarding the company’s forward-looking momentum is really sound. So we love it, we have a buy in it.

Ally Selby: Few companies have published advice. This is a good thing. To you Lucas, is it a buy, a hold or a sale?

Lucas Goode (SELL): Listen, this is a sale to us for valuation purposes only. We think it’s a good company with a strong position in this middle market, but I guess there are a couple of things that concern us with Altium. First, Octopart generated the majority of revenue growth last year, which is not really a software company and has been a real beneficiary of the supply chain issues we have seen over the past two years. .

Additionally, we believe there has been a real shift in effort on the part of the company from adding subscribers to generating more money from existing subscribers. This isn’t necessarily a bad thing, but to us it just suggests that the addressable market may not be big enough to support a 50x stock earnings valuation.

Ally Selby: OK. Then we have Megaport. Brokers seem to absolutely love this stock right now. Over to you, Lucas. Is it a buy, hold or sell?

Lucas Goode (SELL): Listen, we are value investors. We don’t believe in multiple incomes, so this is a sell for us. We are not going to pay for growth without profit and I think with Megaport they have a really interesting product, but it is a product that, although it should have very high additional margins, has really had some hard to generate the returns you would expect because it’s actually a very difficult selling cycle.

That’s why we see them trying to branch out from using SD-WAN vendors as resellers to going through third parties, and they’ve really struggled to get there and I think the market and the company may have -be underestimated how difficult it is. So it’s a sale for us.

Ally Selby: He was a very bad performer this year. That’s down 60%. James, over to you. Is it a buy, hold or sell?

James Gerrish (BUY): I’m going to the other side. Got it on a purchase here. Lucas made some very good points about the growth and challenges he’s had. I guess our thesis is that this is now factored into the price. So it’s gone from $22 to around $7 at the moment. This is a very big drop. Obviously, they had to refocus on how they sell their product. They had some problems with the level of growth they were achieving. I think they fixed that problem. They provide a bit more clarity and information to the market and I think that’s positive. So from a risk and reward perspective, I think it’s a buy here around $7.50.

Ally Selby: OK. The last stock today is Tyro Payments. Mike Cannon-Brookes actually recently made an offer for the company but was rejected. Last for you, James. Is it a buy, hold or sell?

James Gerrish (HOLD): Yeah, that’s a catch for us. I think despite the corporate activity that is unfolding and could continue to unfold, it is trading around this level of supply right now. From a business point of view, they have a very good position in the market, but they have aging hardware that needs to be replaced. So you have the cost thesis, but then they have to spend a lot of money on this aging hardware. So that’s a catch for me.

Ally Selby: Its share price is down 56% since the start of the year. To you Lucas, is it a buy, a hold or a sale?

Lucas Goode (SELL): Sorry to be a Debbie Downer, but that’s a hat trick to sell on my part. Grok has obviously staked the business, but it’s trading above the bid price and we see some downside risk if an offer doesn’t materialize. We’re not particularly positive about the company itself.

I think it’s a really competitive space, payouts, so any gain in market share, operating leverage that you see is swallowed up by fee pressure. I guess I would compare it to the MiniDisc of payments, right? It is superior to what came before. It’s better than EFTPOS or tapes, but it seems to have already been superseded by better technology. So it’s a sale on our part.

Symbio Holdings (ASX: SYM)

Ally Selby: OK. As you mentioned, you were a bit Debbie Downer in this episode. So I’m going to push you to name a stock that you’re buying right now. A tech stock you love. What have you brought us today?

Lucas Goode (BUY): So a key buy for us in the tech sector portfolio is Symbio, which is a company that not everyone may have heard of because it’s not aimed at consumers. But in fact, we all interact with their software every day.

If you call your Uber driver because you wonder why he is driving in the wrong direction, this virtual phone number in the associated software is fully managed by Symbio. Whether you click to call a restaurant to make a reservation or connect to a Teams call on your phone, everything works on Symbio. So many use cases.

Compound recurring gross margin within wholesale at 20%. It’s founder-led, it’s profitable. We think purely domestic business is much more valuable than the current share price suggests, but the real upside is in Asian expansion. They’re now living in Singapore and expanding to Malaysia next year, and the opportunity there is huge because the use cases that I mentioned, you can’t even do them in those countries because the old telecommunications operators have a stranglehold on the infrastructure. So we think there are huge opportunities for Symbio and it’s a conviction buy for us.

Ally Selby: OK. Over to you James. Your time in the hot seat. Can you beat Symbio? What is your stock for us?

James Gerrish (BUY): I’m going to present something totally different. It’s all about growth and revenue multiple. It was one of the hottest IPOs in 2020 in the US market. Listed at US$120 per share, rose to US$400 per share. It is now back to US$165 per share. The company is Snowflake. It’s all about data and getting insights and context around data and we know how important that is to a wide range of businesses, from small ones like ours to large multinationals. So Snowflake, about US$165 per share.

Ally Selby: Alright, I absolutely loved this episode and I hope you did too. If you did, why not give it a like? Consider subscribing to our YouTube channel. We add so much awesome content every week.

Buy Hold Sell is a weekly video series produced by Livewire Markets. This article has been first published on Livewire Markets.

Disclaimer: The information contained in this presentation is general in nature and should not be relied upon. Before making any investment or financial planning decision, you should consult a licensed professional who can advise you on the suitability of the decision for you. Contributors to this program may have business or financial interests in the companies mentioned.

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