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Where to now for Aussie tech?

The ASX All Technology Index is down 23% in 2022

The ASX All Technology Index is down 23% in 2022 in large part to fears about rising inflation, interest rates and the ongoing invasion of Ukraine.

The selling has been indiscriminate. High-quality shares such as Xero are down over 30% while more nascent businesses like Zip are down 75%.

Despite the carnage in ASX tech shares, the benchmark S&P/ASX 200 index is just 1% of its all-time highs as commodity prices offset the tech decline. 

  • So where to next for ASX tech shares? Here’s the bull and bear case. 

    Investor sentiment is low 

    The bull case for ASX tech shares largely centres on that this is a pullback the market needed. Companies such as realestate.com.au owner REA Group had run ahead and are now returning to more normal levels. COVID beneficiaries such as Temple & Webster will see growth slow as shoppers return back to stores and government stimulus recedes.

    The latest monthly Bank of America fund manager survey – which questions managers with a total of $833 billion in funds under management – said 71% of managers were negative about growth with profit expectations back at the lows of March 2020.

    Further supporting this claim is CNN’s Fear & Greed speedometer which estimates the amount of dovishness in the market. Currently sitting at 39 out of 100, the market remains fearful. While it’s difficult to get a definitive read on sentiment, it’s clear investor exuberance has exited and the pullback could be nearing an end. 

    Yet multiples remain elevated 

    The issue with the bull case is that multiples remain elevated. This is best illustrated by cloud service provider Megaport, which provided a disappointing third quarter trading update yesterday, falling 20% in one trading session.

    The company only marginally missed growth expectations. But the issue is that even after the decline the company still trades on a revenue multiple of 13. That number could easily halve, and the market wouldn’t blink twice. 

    Other examples include Altium which is trading on an EBITDA multiple of 60 while Wisetech on 53.

    Hammering the point home, Ophir Asset Management highlighted that the heavy NASDAQ remains well above historical averages.

    Then there is the elephant in the room: interest rates. The Reserve Bank of Australia signalled it could begin raising rates as soon as June, with economists predicting three rises before the year is out.

    Similarly, the US Federal Reserve is expected to raise rates 100 basis points over the next two meetings in May and June.

    Interest rates rising is a doubled edge sword. Businesses with a strong competitive position and the ability to pass on input costs will outperform weaker peers.

    But for emerging companies with profits years away, rising rates increase the cost of capital thus reducing the value of those cash flows today.

    Where to next for ASX tech shares? 

    Short term gyrations in share prices are the cost of entry for equity investors.

    The key is to derive which companies will be long-term winners. Characteristics such as the number one in a market, loved by customers, insider buying and profitable robust growth should make it through the current bearishness.

    Conversely, low or no growth, high competition, insider selling, unsustainable unit economics or no line of sight to profitability will be continued to be punished.

    As always, tread with caution.

    Disclosure: At the time of writing, Lachlan owns shares in Temple & Webster.

    Information warning: The information in this article was published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169

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