For the best part of 2022 investors could have been forgiven for thinking technology stocks only went down.
From a previous sea of red, some green shoots have begun to emerge in technology stocks marking a notably positive beginning to 2023. Several factors contribute to this shift, including speculation regarding the US Federal Reserve’s potential abandonment of its rate-raising strategy, mounting pressure on businesses to streamline expenditures and demonstrate a path to profitability, and the pervasive belief that artificial intelligence (AI) will dominate the global stage. Consequently, the downtrodden tech sector is now enveloped in an atmosphere of optimism.
When you think of large US tech generally the FAANG acronym comes to mind and these companies have been some of the bigger market movers, bolstering US markets forward.
In 2022 FAANG lost its bite and its name.
For those unaware, the original acronym FANG was created around 10 years ago by Jim Cramer (I guess he does get some stuff, right?) when he referred to the dominance of Facebook (NASDAQ: META), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and Google (NASDAQ: GOOG). Since then, Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) have been welcomed to the group, Netflix was cut and now a more appropriate acronym has emerged: MAMAA. Additionally, after its recent rise, Nvidia could be considered an acronym candidate.
MAMAA is made up of the newly named Meta Platforms (formerly Facebook) Amazon, Microsoft, Apple and Alphabet (ex Google). This basket of shares has had an incredible 6 months with investors questioning whether it is too good to be true and if this is the beginning of a new bull market.
Leading the pack is Meta Platforms, showcasing an impressive surge of over 120% in the past half-year, rebounding from the broader downturn experienced by the MAMAA group. Meanwhile, the other major players have also enjoyed a prosperous period, with Amazon (+36%), Microsoft (+33%), Apple (+27%), and Alphabet (+31%) all demonstrating noteworthy gains. It is crucial to recognise that these companies collectively possess a market capitalization exceeding $8 trillion, accounting for nearly one-third of the entire Nasdaq index. Consequently, when these entities experience an upward trajectory, they significantly impact the index and potentially distort the overall perception of the technology share market.
Furthermore, it would be remiss not to acknowledge the prominence of NVIDIA Corporation (NASDAQ: NVDA). As a semiconductor behemoth, it is poised to join the ranks and further complicate the aforementioned acronym. Boasting a market capitalisation just shy of US$1 trillion, NVIDIA has witnessed an extraordinary surge of over 120% in six months. Notably, it experienced a staggering increase in market capitalisation of US$184 billion within a single day, owing to the surge in demand for artificial intelligence and the heightened anticipation of increased earnings.
What about the ASX?
Enough about the US though, has this enthusiasm for tech translated to some of the ASX tech favourites?
Continuing the trend of acronyms, a few years back, the term “WAAAX” emerged as an attempt to classify Australia’s most successful technology stocks. The WAAAX group, comprised of WiseTech Global (ASX: WTC), Afterpay, Altium (ASX: ALU), Appen (ASX: APX), and Xero (ASX: XRO), has experienced a blend of outcomes since the formation of this quintet. Notably, Afterpay was acquired by the US-based company Block (ASX: SQ2; NYSE: SQ) in August 2021, a development that could potentially symbolise the pinnacle of the post-pandemic surge in cash-intensive technology stocks.
So with the ‘A’ of Afterpay gone, how have the remaining WAAX companies performed recently?*
WiseTech Global
WiseTech Global, a provider of software solutions to the logistics industry has mirrored the performance of US tech counterparts up over 40% in the past 6 months. This is nothing new for WiseTech though, with a 5 year price return of 373% equivalent to a 5 year compound annual growth rate (CAGR) of 36.6%!
WiseTech has seen its revenue growth return after a difficult period through the pandemic reporting an organic increase of 35% in the first half of 2023 and converting that into a 52% increase in free cash flow compared to the prior period. At the time of writing, WiseTech is trading at a 12 months price to sales multiple of 29 as of the end of March 2023, which is at the higher end of technology valuations.
Altium
Unfortunately for Altium shareholders the company hasn’t enjoyed the same price appreciation that WiseTech has experienced, relatively flat for 6 months.
Altium is in the business of development and sale of computer software. The company lays claim to some of the MAMAA businesses as customers as well as Tesla (NASDAQ: TSLA), Spacex and NASA. Altium has emerged from declining revenues during the early stages of the pandemic to now showing growth in the top line again. In its 2023 Half-Year results presentation the company displayed an increase in revenue of 17% compared to the prior corresponding period as well as 30% growth in profit after tax.
While these are solid numbers it would appear that a lot of this is baked into the current valuation.
At time of writing, Altium currently trades at around 14 times its last 12 months revenue which is down from a 5 year high of 24 times at the end of December 2021 and off a low of 10 times in March 2020.
Appen
The second lot of the A’s, Appen’s 6 month increase of 25% while positive, will do little to relieve long term holders of their pain.
Zooming out you get a better picture of how the AI data labelling business has performed with a 5 year price decline of over 70%. Appen has seen its revenue and gross margins decline, taking the share price with it.
Perhaps the recent rebound is the start of a turn around for Appen, however the company might be swept up in the momentum of AI-mania. Time will tell.
Appen recently completed an equity raising with the proceeds to be used to fund one-off costs associated with a cost reduction program and provide support for its balance sheet and working capital. Like many tech businesses, Appen has seen the light and is focussing on cost reduction and claimed to have identified ~$10 million of cost savings in its 10 May 2023 announcement.
Xero
Finally, the X of WAAX being Xero.
The accounting software company’s shares more than halved during the 2022 calendar year, dropping from a peak of $146 in January and falling into the $60’s in November. Hindsight shows that the end of 2022 would have been a great time to buy with the share price appreciation over 50% to be the best performer of the group to date. Like Appen, Xero has shown a focus on cost cutting with their new CEO Sukhinder Singh Cassidy announcing in March 2023 that they would be cutting staff and streamlining Xero’s business.
This was followed by their 2023 earnings results which showed revenue growing by 28% and free cash flow increasing by $100 million to $102 million.
Xero did however report a net loss of $113 million up from a loss of $9 million in the prior period as Singh Cassidy and her team wrote off a number of previous acquisitions.
So who performed better?
In the battle of acronyms, it seems that MAMAA could surpass WAAX in terms of performance, with the US-based businesses all experiencing growth. However, some of the ASX-listed companies have still demonstrated commendable share price appreciation. As FAANG transformed into MAMAA, it raises the question: if this heralds the dawn of a new bull market, could we anticipate the emergence of fresh ASX acronym contenders?
So, who next?
Outside of the WAAX group there have been some other technology companies that have had great price movement over the last 6 months.
NEXTDC Limited (ASX: NXT), a provider of data centre outsourcing solutions has seen its share price grow 33% soaring above $12 per share well off its 52 week low of $8.22. Designer and manufacturer of electronic equipment Codan Limited (ASX: CDA) has doubled its price over the same period following a positive trading update in January. Finally, Weebit Nano Ltd (ASX: WBT) has had a remarkable increase in price of 78.8% which is impressive given the business has no revenue as of 31 December 2022 or cash receipts within the March 2023 quarter.
While one swallow doesn’t make a summer, the last 6 months have been welcome relief for some tortured tech investors. As the nightmare of 2022 is beginning to disappear into the rearview mirror, is there a sustained bull market on the horizon? Or perhaps a trap for those tech inclined investors who are just seeking some relief in the rally? Either way, we’ll only know in hindsight but it is encouraging to see that after a significant sell off there is some life in the sector and it’s not completely isolated in America.
*Disclaimer: we do not currently hold these companies in the TAMIM portfolios.
This week’s reading and viewing list covers the new Apple Vision, the birth of Bulls (markets), the value of good ideas and walking away with Peter Lynch, amongst other ideas we are sure you will find interesting and useful…
This week’s reading and viewing list covers, what Richard Bernstein is seeing that is making him bullish, Professor and Hedge Fund Manager Chris Beggs, conquering your fears with Tom and Jerry, techs big bets and a keynote by Howard Marks amongst others…
Successful investing goes beyond making smart decisions; it requires avoiding mistakes and adopting a mindset of longevity and endurance. While taking risks and investing optimistically are important for building wealth, keeping your wealth also demands a mix of humility, frugality, and steering clear of catastrophe.
All investment journeys evolve in different ways, with many twists and turns along the road. Everyone has different goals which have varying return requirements in a landscape of changing risk profiles. As investors, if we invest in just one asset class today and then go to sleep on it for years, we could wake up to a rude shock. Not only do investment goals evolve as time goes by and experience accumulates, the assets that we invest in also have varying risk/return profiles over time.
Finance and investment writers tend to lend attention to things that are huge, profitable, famous, or influential. Of course, celebrating wins and helping investors find tails that wag the dog i.e. security selection is important. However, it is equally (if not more) important to emphasise one crucial aspect that is often less spoken about in achieving long-term financial success: asset allocation.
What is Asset Allocation?
Asset allocation is the process of determining where to invest money in the market. It involves apportioning a portfolio’s assets across different asset classes, such as equities, real estate, bonds, cash, and other options like private equity and alternative investments. The key principle behind asset allocation is that different asset classes do not move in perfect correlation with one another, meaning their performance doesn’t rise or fall at the same magnitude simultaneously.
Why is Asset Allocation Important?
Asset allocation has a significant impact on the overall returns of a portfolio. Choosing the right asset allocation maximises returns relative to an investors risk tolerance. This means it helps an investor get the highest payoff possible for the amount of money willing to be risked in the market.
Diversification is a key component of asset allocation. It applies not only to the split between asset classes but also within asset classes. By diversifying across different regions, sectors, and investment styles within equities, and across various segments and durations within bonds, investors can reduce risk and potentially achieve a less volatile overall portfolio return. Diversification protects wealth by spreading investments wisely, mitigating the impact of a decline in any single investment or asset.
Types of Assets to Consider: Avoid Putting All Your Eggs in One Basket
The famous saying “don’t put all your eggs in one basket” is especially relevant in asset allocation. By diversifying investments across various asset classes and within each class, investors can reduce exposure to any single investment’s risks. This strategy helps mitigate losses if one asset performs poorly while others compensate.
When allocating assets, investors have a wide range of options to choose from. These may include:
Equities: Investing in stocks represents ownership in publicly traded companies and offers the potential for long-term capital appreciation. Equities can be diversified across different industries, sectors, and geographical regions.
Fixed-Income Investments: Bonds and other fixed-income instruments provide a steady income stream and are considered less risky than equities. They can include government bonds, corporate bonds, municipal bonds, and treasury bills.
Cash and Cash Equivalents: These include money market funds, term deposits (CDs), and savings accounts. Cash investments provide stability and liquidity, making them suitable for short-term needs and emergencies.
Real Estate: Investing in real estate can provide both income and potential appreciation. This can be achieved through direct property ownership or real estate investment trusts (REITs).
Alternative Investments: Hedge funds, private equity, commodities, and other alternative investments offer diversification and potential returns not correlated with traditional asset classes. However, they often involve higher risks and may require specialised knowledge.
Portfolio Rebalancing and Asset Allocation
Asset allocation isn’t a one-time event. Your desired asset allocation changes over time as you get closer to your goals. But even before then, you may notice portfolio drift, or the movement of your allocations away from where you set them. This could happen if stock values rise suddenly or if bond interest rates (and their associated prices) fall.
Most experts recommend you check in on your portfolio once or twice a year to see how it’s doing. Depending on your holdings’ performances, you may need to rebalance, or sell some securities and buy others to bring your asset allocation back into line.
Risk-Reward Ratio and Individual Goals
By clearly defining target returns and assessing risk tolerance, investors can align their asset allocation with their individual goals. Remember, striking the balance between risk and reward is an individual pursuit – time horizon, risk tolerance, personal preferences and goals vary from person to person. For example, here are retirement scenarios for three different investors:
Investor A, a 22-year-old with a retirement goal in 40 years, possesses a high tolerance for risk. Their main objective is to increase their retirement savings over the next four decades. They acknowledge the market’s fluctuations but prioritise investments that offer the potential for higher returns. Their ideal portfolio would be diversified and expose them to the stock market, known for its historically high rates of return. Here’s an example of asset allocation:
80% allocation to equities
Within equities:
30% in mid-cap & large-cap stocks
70% in small-cap stocks
15% allocation to real estate
5% in cash
Investor B is 40 years old and plans to retire in 15 years, indicating a moderate risk tolerance. Although they have more than a decade left until retirement, the limited time frame hinders their ability to recover from significant market losses. They are open to taking some risk to continue growing their money, but they cannot afford to lose substantial amounts before retirement. They seek a diversified portfolio that offers moderate upside potential while safeguarding them against major market downturns. Here’s an example of their asset allocation:
40% allocation to equities
Within equities:
50% in mid-cap & large-cap stocks
50% in small-cap stocks
40% allocation to real estate
10% in bonds
10% in cash
Investor C is 65 years old and has just commenced retirement, possessing a low tolerance for risk. Their primary goal is to preserve their capital while still seeking selected opportunities for growth, without taking on excessive risk. As they plan for their retirement savings to last for at least the next two decades, avoiding losses becomes crucial. Their preferred retirement portfolio would be diversified and structured as follows:
30% allocation to equities
Majority of holdings are income producing large-caps with long operating history
Smaller allocations to growth opportunities
30% allocation to bonds
20% allocation to real estate
20% allocation to cash
While the above are just examples, they do illustrate how investors allocate assets in their portfolios based on their risk tolerance and time horizons. It is important to note that these profiles serve as samples and demonstrate how asset allocations may vary according to different risk tolerances and time horizons.
The TAMIM Takeaway:
Understanding the importance of asset allocation is crucial for investors. By diversifying portfolios across different asset classes and within each asset class, investors can optimise risk-adjusted returns. While not as “fun” to talk about as individual stock selection, asset allocation plays a dominant role in determining the overall return of a portfolio.
Diversification is acritical element in protecting and sustaining wealth by ensuring that investments are spread wisely across various baskets. Building a well-diversified portfolio aligned with individual goals and time horizon is key to long-term success in investing.
This week’s reading and viewing list: Why Monetary Policy still confuses economists, the legendary Sam Zell’s Final Wise Words, don’t listen to stories and an interview with valuation guru Aswath Damodaran
