By Jessica Sier
Tech stock investors face a year of stiff competition to buy into quality local companies such as WiseTech and Xero as tight capital markets keep the lid on fresh listings and potential IPO candidate Canva keeps investors guessing if it will float abroad or locally.
In an energetic start to the year, the ASX technology index has leapt 10 per cent higher. But market watchers warn the “ASX premium” may have peaked, leaving tech company price performance at the mercy of US interest rates and the dislocation between sky-high private company valuations and volatile public market investors.
Thomas Rice, portfolio manager at the Perpetual Global Share Fund, said: “January has been a very strong month and, according to the market, the end of the interest rate rising cycle seems to be in sight.
“So we might see tech stocks have another leg down at some point, but a lot of them faced pretty significant pain in 2022, so some may have really bottomed out.”
While investors keep guessing if inflation will keep marching higher and where interest rates might land, fund managers expect private equity to keep circling tech stocks, a theme that took hold last year.
Andrew Mitchell, portfolio manager at Ophir Asset Management, said: “The narrative has shifted for unprofitable tech; get profitable or show clear path to profitability or someone else will take the reins.
“The days of relying on [limited partnerships] to continuously fund an unprofitable tech company are gone.”
The Foreign Investment Review Board will soon decide whether to approve US-based K1 Investment Management’s $486 million takeover bid for ELMO Software. And a winner is likely to emerge out of the battle between Canada’s Alludo and Sydney’s Potentia Capital for Nitro Software.
More job cuts
To fend off private equity, tech companies have been cutting costs sharply in a bid to firm up profitability. While reducing future spending is one thing, staff layoffs began in earnest at the end of last year and indicate a move to optimise the cost base, which investors are likely to reward.
Tobias Yao, portfolio manager at Wilson Asset Management, said: “We saw companies lessen how much they were reinvesting into growth costs, but now we’re seeing them actually cut people, which is a very different conversation and one we’ll see more of this year.”
Telco infrastructure company Megaport has been flirting with breaking even on cashflow for some time, and the market rewarded its decision last year to lay off 35 people to get there.
Design marketplace Redbubble made 14 per cent of its staff redundant this month, and has rolled back the advertising program it launched halfway through last year.
Redbubble hopes to reclaim its positive cashflow mantle by the end of the year.
Life360, meanwhile, cut 80 jobs this month and flagged its plans to achieve profitability by the second quarter of this year, a decision that lifted the share price higher.
The US-based family tracking software company has also leveraged a powerful tool that investors say will separate the quality tech companies from those struggling: pricing power.
Last year, Life360 lifted prices for its monthly membership plans by 50 per cent.
“For a long time tech companies have had a ‘if it’s not broken, don’t fix it’ attitude when it comes to price elasticity,” Mr Yao said.
“But now they need to test it to shore up revenues and good products and services will come out on top.”
More buys for WiseTech
Logistics software giant WiseTech has started the year with a bang, spending $US230 million ($325 million) to buy US-based transport management software company Envase Technologies.
WiseTech has a history of snapping up complementary software businesses and integrating them into its broader logistics product suite, and Mr Wang said there were many more opportunities for the cashed up company.
“WiseTech has always wanted to buy assets before anybody else could and they’ve proven they can integrate these products and businesses into their own offering,” he said.
“So we could see some more buys from them as they spot more complementary technology emerging.”
Another fast-growing tech stock shaping as a favourite among fund managers is Carsales, which bought the rest of US-based Trader Interactive last year for a hefty $US809 million ($1.2 billion), and is now integrating the acquisition into the business.
Over the past year, stocks including WiseTech, aerial imaging technology company Nearmap, accounting software company Xero and Megaport have enjoyed what is known as the “ASX tech premium”, an elevated share price compared with their global peers, which are suffering as higher interest rates and roaring inflation hamper growth prospects.
Australian stocks often manage to sidestep the woes facing their US and European counterparts because of the relatively few quality technology names on the ASX, and the resulting fight among domestic fund managers to own them.
Leo Wang, technology analyst at PAC Capital, said: “Our interest rate cycle hasn’t been as severe as the US and so ASX tech stocks trade at a slight premium.
“But that premium seems to be at its relative peak, so it will be interesting to see if more quality technology names arrive in the ASX. It doesn’t seem like the IPO pipeline will open up for another year or more yet.”
In a dismal IPO year last year, only $1 billion was raised through listings, down 92 per cent from 2021, according to data from the ASX.
Australian fund managers are eager to see whether Canva, the graphic design tool that is booking about 100 million users a month, will list in Australia or head to the United States as Sydney-based Atlassian did.
Despite much speculation, Canva has remained tight-lipped on its floating plans, but Mr Wang said the maturation of the Australian tech investor scene might prove attractive.
“Fund managers have been fighting to own Xero and WiseTech so the demand for quality is there, which bodes well for the high-flying start-ups who might list,” he said.
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