Tech stock bubble warnings rise amid coronavirus rally
Shares in buy now, pay later company Sezzle have skyrocketed since falling to a 35-cent low on March 23.
- The ASX’s tech index but is now up 12 per cent for where it started in February
- The Nasdaq has hit record highs during the pandemic, while the Dow Jones Industrial Index has not recovered its COVID-19 losses
- Fund managers are split on whether the current valuations are justified
The US company, which listed on the ASX a year ago, followed the market down as COVID-19 concerns spooked investors.
But just as Sezzle rode the wave down, so too did it surge higher to increase an eyewatering 2,500 per cent to $8.50 a share earlier this week.
That rapid growth in the space of about four months is emblematic of what has been happening in the broader technology space.
As Microsoft chief executive Satya Nadella said when delivering the software company’s third quarter results in April: “We’ve seen two years’ worth of digital transformation in two months.”
Sezzle chief executive Charlie Youakim agreed the pandemic had caused a rush on technology stocks.
“If there’s one thing that’s working right now, it’s e-commerce,” he told The Business.
But, he argued, while his business had been caught up in the investor pile-on, his company was also delivering.
“I don’t like to comment on price, but what I can say is I think investors are probably getting excited about our growth,” Mr Youakim said.
“We’ve been consistent every quarter that we give an update. We’ve had really, I would say, quite phenomenal growth and we’ve made improvements on our top line.”
In its second quarter results last week, Sezzle reported a 243.2 per cent year-on-year increase in the number of consumers using its payment platform and a 219.2 per cent year-on-year increase in the number of merchants using it.
Underlying merchant sales rose 58 per cent in the June quarter to $272.3 million, making an annual increase of 348.6 per cent.
While its user base is up about two-and-a-half fold in 12 months, and its merchant sales has increased three-and-a-half fold, those rates of growth are no match for the 25-fold increase its share price has experienced since March.
It is share price growth like that that has some fund managers wary.
Could history repeat?
Roger Montgomery, who manages $1.4 billion of investments with his firm Montgomery Investment Management, said the rapid growth of cash flowing into technology stocks was concerning.
“There are a few warning signs at the moment that we have bubble-like conditions,” he said.
“One is the very significant wave of profitless companies now hitting the technology bourses in the United States and IPOing [listing on the share market].
“Another one is the very rapid increase of prices beyond the growth that can be expected from the underlying businesses.
“And the third warning sign is the huge increase in retail trading in these stocks.”
Mr Montgomery is wary of a repeat of the dot-com boom and bust.
The value of Australia’s new All Technology Index, which was launched in February this year just as markets started tumbling, has soared back from its March low, earlier this month jumping 12 per cent above its launch rate.
Its growth has eclipsed the broader All Ordinaries, which is yet to return to its February high.
It is a similar picture in the US.
The blue-chip Dow Jones Industrial Average dropped as much as 35 per cent from the start of this calendar year to its low in late March. While it has recovered some of those losses, it still remains below its January starting point.
The technology-heavy Nasdaq also saw widespread losses in March, but its recovery has been significantly stronger and it is now about 15 per cent higher than where it started this year.
Technology investment fast tracked
Nick Griffin, the chief investment officer at $2 billion fund Munro Partners, said the COVID-19 pandemic, which had forced many office-based workers into their homes, was a big reason why investment in technology stocks was soaring.
“The social-distancing side of COVID-19 has meant the digital acceleration has been brought forward,” he explained.
“A lot of this was happening already — ecommerce was already taking share, videoconferencing was getting better because of this acceleration in computing.
He said low interest rates were also sending investors in search of yield.
“Interest rates have dropped to zero, so the discount rate that’s been embedded is lower. That’s allowing valuations to expand and, in some cases, quite dramatically,” he said.
Valuations heading into the clouds
Australian cloud company archTIS has also seen its share price rise during the pandemic.
Its secure online platform Kojensi is accredited by both the US National Security Agency and Australian Signals Directorate for top-secret information sharing online.
It was commercialised last year.
“We’ve had a number of early adopters, including the Attorney-General’s Department, the Commonwealth Ombudsman, and we made a sale to the Australian Criminal Intelligence Commission as well,” archTIS chief executive Daniel Lai said.
Its share price dipped from 13 cents at the start of the year to 5 cents in March, but traded as high as 20 cents earlier this month after signing a deal with American global aerospace and defence technology company Northrop Grumman.
“COVID-19 has seen that challenge of the workforce move from an office environment to a remote environment, of course Kojensi is a software-as-a-service cloud platform for secure content collaboration, so it fits that bill from moving to that work-from-home environment,” Mr Lai observed.
He said his company’s share price growth had not just been caught up by the broader momentum.
“The geopolitical situation, with the tension between China and Australia, has also affected that and the announcement from the Prime Minister of the unprecedented amount of hacking that’s been going on in Australia also highlights that that there’s a real need for these sorts of platforms of technologies,” Mr Lai added.
While Mr Montgomery was sceptical about the rapid growth in technology stocks across the board, he said data sharing was an area he was looking at.
If prices do come down like they did in the dot-com era, Mr Griffin from Munro Partners thinks it will just be a blip.
“Computers around the world are getting faster every year and so disruption accelerates every year,” he said.
“It’s important to recognise that even if COVID-19 went way tomorrow, this will still happen.
“This is the revolution of our lifetime.”