Appen, Altium, Computershare: Aussie tech plays for your watchlist
The rise in bond yields has big implications for companies with high earnings growth, writes Nicki Bourlioufas.
The pandemic has hit local tech players hard and share prices could keep falling as bond yields rise on fears of higher inflation, but the sector now offers some buys, asset managers say.
This reporting season has seen big falls in prices of technology stocks, triggered by quickly rising bond yields, which many observers say could climb. In Australia, the 10-year bond yield is trading around 1.63 per cent, up 59 basis points in just one month, and in the US it is 1.41 per cent, up 32 basis points over a month.
“Long-dated bond yields have been rising very quickly recently, implying the market expects the economy to improve and interest rates to rise—much sooner than the RBA has been indicating,” says Morningstar analyst Gareth James.
“This has big implications for companies with high earnings growth, in that their valuations and share prices are relatively sensitive to interest rates, all else equal, so it’s not surprising to see high growth stocks be hit recently considering what’s happening to long term bond yields,” James said.
According to a research note from UBS, bond yields could keep rising, driven up by inflationary expectations, and technology stocks could be hit the hardest of all.
“Steadily rising real yields should reflect better growth prospects for equities but if they rise suddenly, pushed higher by flows from rapid repositioning, then we think the impact of a higher discount rate will pull equities lower,” the UBS note said.
“High price/earnings growth stocks, such as those in the tech and healthcare sectors, are more sensitive to changes in the bond yield than low P/E value stocks because they have longer duration (more cash flows in the future),” they say.
If there is continued rotation to value stocks and large caps, then it could come at the expense of Australian technology shares, says Kanish Chugh, head of distribution at ETF Securities.
“This is because Australian tech companies are generally classed as ‘growth’ stocks due to their higher valuations. This puts Australian tech in something of a contrast to US tech companies, which can be classed as value or growth. Whether this rotation occurs or not will hinge largely on interest rates. Higher interest rates could trigger a rotation. And with that: all eyes are on the US Fed,” says Chugh.
Local tech players hit hard
Coinciding with rising bond yields has been a plunge in the value of shares in artificial intelligence and machine learning company Appen (ASX: APX). The company’s full-year revenue rose 12 per cent to $599.9 million while underlying earnings before interest, taxes, depreciation, and amortisation rose 8 per cent to $108.6 million over the year to 31 December 2020.
Despite that, its shares tumbled $2.30 to $17.95 after its results were released, continuing their downward trend to be quoted at $16.43 on 26 February, down from their month high around $25.
Electronic design software company Altium (ASX: ALU) has also fallen hard. The company recently announced a decline in first-half revenue for fiscal 2021 of 4 per cent to US$89.6 million, compared with the same period one year earlier (pre-COVID), coming after eight consecutive years of double-digit revenue growth.
The company said the decline was “atypical” and reflects the economic slowdown caused by extreme COVID conditions in the US and Europe, and a challenging environment, post COVID in China, for license compliance activities.
UBS has upgraded Altium to a buy after its results and with the drop in its price from a 52-week high from $40 to around $26.
“We believe Altium’s strong balance sheet position may allow it to capitalise on M&A opportunities medium-term to accelerate its objectives and expand its total available market (TAM). Willing to take a medium-term view, [and] upgrade to Buy,” UBS analysts say.
However, analysts from Goldman Sachs and not so confident. “We downgrade our estimates again … we believe its earning downgrade cycle has not yet troughed,” said a recent research note, putting a target price of $32.35 on the stock.
Chris Tynan, investment analyst at DNR Capital, says Appen and Altium remain risky buys for investors. “Appen and Altium would market themselves as software-as-a-service businesses, but they have much lower recurring revenue profiles, and we feel operate in limited addressable markets and with aspirational rather than tangible growth strategies, so do not represent compelling value, even after recent sell-offs.”
'Australian tech companies are generally classed as "growth" stocks due to their higher valuations. This puts Australian tech in something of a contrast to US tech companies, which can be classed as value or growth'
Value seen in some firms
However, value is seen in other technology companies, in particular, Computershare (ASX: CPU). The company features on Morningstar’s Global Equity Best Ideas list and analyst Gareth James believes the company is undervalued.
“Narrow-moat Computershare's resilient first-half financial result was broadly in line with our expectations and we've maintained our earnings forecasts and $17.50 fair value estimate. At the current market price of $13.25 we continue to believe Computershare is undervalued,” said James.
Computershare's share price has been affected by the decline in interest rates since late 2019, exacerbated by the coronavirus-related economic downturn and associated interest-rate cuts.
However, Computershare's underlying earnings have performed well in recent years, and Morningstar expects this to continue. The company’s total revenue for the half-year fell 2.8 per cent to $1.1 billion while net dropped 41.8 per cent to $72.6 million.
DNR’s Tynan agrees. “Computershare’s core services offer incredibly resilient recurring revenues and high margins. Unlike most tech index stocks, Computershare is positively leveraged to rising interest rates as the return on cash balances held on behalf of customers earns a yield, which has fallen in line with rates, but will bounce back if global interest rates normalise.”
Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.