Ground shakes as the tech bulls run

Huge returns from many emerging ASX-listed stocks

By Tony Featherstone

Nobody really knows if the tech sector is in the middle of the next great bull run or already in bubble territory. The only certainty is that capital-raising conditions for public and private tech companies are the best in a decade — advisers are clamouring  for deals, and investors are snapping up quality offers.

The US Nasdaq Composite index has soared 36 per cent from its 52-week low this year as investors have re-rated tech stocks, and there is a boom in merger-and-acquisition and float activity. Twitter soared on listing this year and Facebook, after a rocky start, has almost doubled since mid-July.

Australia’s tech sector is also booming. Shares in micro-jobs site Freelancer has soared almost threefold from its issue price within weeks of listing. Accounting software provider Xero, dubbed the “Apple of accounting” by one investment bank, has soared six-fold this year for a $3.85-billion capitalisation.

The accompanying table shows huge returns in many emerging ASX-listed tech stocks, albeit off a tiny share-price for several companies.  Moko Social Media has returned 875 per cent over one year; Mobile Embrace has delivered 686 per cent; SmartTran Holdings is up 352 per cent; and Facilitate Digital Holdings is up 350 per cent.

Dominet Digital Corporation CEO Domenic Carosa believes there is a much more substance to this tech boom compared with the last bull run in the late 90s. “There’s a lot more focus on sustainable revenue and profit growth, rather than all the focus on outdated metrics such as site traffic. Also, launching a minimum viable technology product costs about a tenth of what it did a decade ago.”

Carosa believes the tech sector has much further to run. “I believe we’re still in the early to middle stages of the boom. History tells us boom sectors usually run for at least a few years. The mining sector, for example, was hot for several years, and I expect the same for tech stocks”.

Booming sentiment towards the tech sector is aiding capital raising, says Carosa. “We’ve always received lots of calls from tech companies wanting to raise capital. In the last two months, my phone has run hot from corporate advisers wanting tech assets brought to market through Initial Public Offers or backdoor listings. There’s very strong interest now in emerging tech stocks from sharemarket investors.”

Carosa adds: “This is the best time in years for technology companies to raise capital, especially with the broader IPO market booming. It’s no longer just a matter of whether quality tech companies will get the money, but who are the right strategic investors to get that capital from.”

As a leading investor in tech start-ups, Carosa has an obvious interest in promoting the sector. Wholesale Investor’s analysis of a selection of established and micro-cap tech stocks shows many still trade on low Enterprise value/Revenue multiples, a commonly used financial metric to compare relative value in fast-growth companies locally and globally.

Enterprise Value/ Revenue shows how many times investors would have to pay for the company’s revenue stream. A multiple below 2 is often considered low for fast-growth tech companies, although investors should recognise this metric is only one of several valuation indicators.

Several stocks in the Wholesale Investor table trade on an EV/revenue multiple below two. By comparison, REA Group has an EV/(FY13( revenue multiple of 6.3 times; Seek trades on 5.3 times and is on 9.4 times, the October 2013 KPMG Monthly Technology Sector update shows. Facebook trades on an EV/revenue multiple of 18, and LinkedIn Corporation is on 22.5 times.

Micro-cap tech stocks should trade on substantially lower EV/revenue multiples than established profitable tech companies, given the high risks. But this simple analysis shows there is scope for a further re-rating of promising tech stocks in the next few years, provided they can engineer rapid revenue growth and deliver on the promise of the next great Bull Run in the tech sector.

–          Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at November 28, 2013. 

–          Domenic Carosa is a shareholder/director of Wholesaleinvestor, shareholder/director of Adeffective, shareholder in Energy One and recently sold DrivemyCarRentals to Qanda Technology