The technology bubble has exploded

Anton Tagliaferro, founder and investment director of Investors Mutual, one of Australia’s leading value investors, echoed the sentiment. He marked the moment of buying now, pay later the price of the darling share hit three figures by asking if the market is “correct pricing on the grounds”.

The likes of Mawhinney and Tagliaferro were dismissed as out of touch for not engaging in tech triumphalism. Their performance suffered as they relied on old-fashioned industrial stocks like Brambles, Amcor and Orica and those not in favor of oil companies like Woodside.

Now, the dramatic shift away from tech shares has proven their skepticism as growth funds that previously exceeded them are struggling.

Many investors mistakenly view tech shares as “a kind of holy grail”, Tagliaferro says, instead of thinking of them as “just another sector of the market”.

“Yes, there have been some amazing winners, as there have been with mining stocks, but with every win, for every Facebook, many don’t get there.”

Simon Mawhinney, chief investment officer for Allan Gray, remains skeptical of tech shares despite the collapse. Renee Nowytarger

So, how quickly do components stumble upon technology companies that represent a wave of disruption and change and what happens from it?

If there is one factor that can claim responsibility, it must be once the illusion of endless free money has ended.

“As you get closer to the speed of light, the laws of Newtonian physics are breaking down,” said Chris Tynan, an investment analyst for DNR Capital, a Brisbane -based fund manager.

“As you approach zero nominal interest rates, the laws of appreciation are broken. That’s why you’ve seen companies trade at 50 times sales and these cryptocurrencies appear and disappear. It just hasn’t been meaningful. ”

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

“When the Fed said they would do everything to control inflation, that’s where things really started to happen,” Younes said.

Rising rates are hurting tech shares because investors are reducing the current value of future earnings, hitting hard on the market value of non -profit companies or so -called concept stocks.

Higher interest rates also increase the amount of capital, which adds an additional burden for businesses that rely on borrowed money to stay afloat.

“If you’re burning money and any income you have is five years-plus out, you’re seriously hit,” Tynan explains.

“What’s more important is the companies that make money now, and that is in the form of energy and resource stocks.”

Anton Tagliaferro, founder and investment director of Investors Mutual, said the tech company’s valuations have become detached from the basics. Dominic Lorrimer

However, there is more to tech wreck than higher interest rates. US mega-cap stocks such as Amazon, Netflix, and Meta are highly profitable and therefore less sensitive to movements in interest rates. But they also have belts.

“Much of the growth in their values [during 2020 and 2021] is really revenue growth, ”Tynan said, which he attributed to a“ pull forward in digitization ”in the early stages of the pandemic.

“What is happening to them now is actually a slowdown in earnings. They have been less exposed to interest rates, but there has been a significant slowdown in earnings. ”

In March, portfolio managers at T. Rowe Price, one of the world’s largest fund managers and one with a long history of investing in growth companies, spoke with Amazon executives.

“They’re pretty optimistic about recovering volumes and trading,” said Sam Ruiz, a Sydney-based investment specialist for the fund giant, before a sudden change of tone at a follow-up meeting two months later. .

“In six or seven weeks, they told us everything had changed. Now, all of a sudden, they’ve overbuilt their logistics and warehousing footprint and they have so many staff.”

A similar dynamic has changed in the growth ambitions of technology companies, triggering a wave of lay-offs and acquisition freezes on Netflix, Meta, Twitter and Amazon.

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

The combination of the sour environment and falling valuations means former high-flying tech stocks are falling, weighing in on the broader market. But not everyone believes it’s time to give up technology.

“If you’re a long -term investor, and you’re willing to wear short -term volatility, I think this is a good time to invest,” said Thomas Rice, a portfolio manager for the Perpetual Global Innovation Share Fund.

Rice’s largest position is in U.S. online residential real estate company Opendoor Technologies, which has halved in value this year. He said the business was unfairly caught in the sell-off.

He also has a look at 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 is in a lot of good stocks of technology,” said Holon research director Tim Davies. “Now is the chance to do the work for ‘I want to buy’.”

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

Cathie Wood, the queen of tech bulls who runs the ARK Innovation Fund, has also doubled in tech despite a fall in the value of her portfolio holdings this year.

Cathie Wood, founder of Ark Invest, remains bullish on tech shares. Sam Mooy

On Thursday, Wood told attendees at the Morgan Stanley conference in Sydney that “we are on the threshold of the most explosive age of change in world history”, and that the mojo will eventually return to tech stocks like Zoom , Tesla and Roku, which are among the largest assets of his fund.

For others, however, the skepticism that compels technology sharing will remain against the backdrop of tightening financial conditions and the threat of recession looming over the global economy.

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

“Take the BNPL, they don’t make money in the best of times. How do they make money in the worst of times?”

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