Technology Space in the face of COVID-19; Investment Tips for Tech Stocks

What Is Triggering Technology Space in The Face Of COVID-19 Crisis?

Burgeoning Opportunities

  1. The new way of living - to practice social distancing has made humans utterly dependent on technology in terms of WFH, e-learning, entertainment, etc, while businesses are adopting tech transitions to sail through the Global Virus Crisis.
  2. Technological adoptions like AI, cloud computing, blockchain, IoT and data science trends that were once perhaps deemed laggards, appear to be the ‘new normal’ across various themes.
  3. AI models have been increasingly utilised in diagnosing virus, predicting outbreak trends, and developing drugs and vaccines.
  4. Lending businesses, asset management and insurance players are some of the leading financial areas under the spotlight for rapid adoption of digital technologies.
  5. Fintech space seems to be sitting on gold mine, with BNPLs experiencing surge in the merchant and transaction volumes.
  6. Investment Banking (IB) area is also seen to be embracing financial technology and embedding them in their core functions, including financial assets management, M&A advisory and risk management.

Challenges

  1. The burgeoning bandwidth demand amid social distancing restrictions may spark off an unprecedented challenge for high-tech companies offering remote video streaming services, conferencing services, online gaming, etc.
  2. Another challenge is data privacy, as transactions that go digital are highly prone to cyberattacks. Utmost security and anti-cyber initiatives are crucial to this fore. Nevertheless, digital transition may see emergence of a digital-first model in the near term, ensuring radical shift in the value proposition offered to clients.

All in all, it’s how firms refine their transformation objectives, evolve from the lessons learned from the pandemic and review their broader strategic agenda.

Looking at sinusoidal equity market trends, does investing in the tech space hold great promise?

  1. While markets have recovered gradually from the March dip, prevailing market risks and volatility cannot be ignored in defining the movement to pre-Covid returns, given investors’ sentiments continue to be driven by US-China trade and political spat, weak macro fundamentals and the second wave of infections seen across several nations.
  2. Market players are increasingly looking at virus-proof themes in building recession-proof portfolio.
  3. The COVID-19 pandemic and the ensuing disruptions have irreversibly altered the technology and digital adoption by corporates, consumers and governments, giving a strong nudge to the sector’s strength in terms of demand and equity market returns.
  4. S&P/ASX All Technology Index launched in February 2020 has outperformed Dow Jones U.S. Technology Index in reviving from March crash:
    • Dow Jones U.S. Technology Index: ~61 per cent return (as on 10 August 2020)
    • S&P/ASX All Technology Index: ~96 per cent return (as on 10 August 2020)
  5. Since stock market crash on 23rd March 2020, ASX Information Technology Index has delivered a return of over 101 per cent (as on 10 August 2020).

While several global health players like Moderna, AstraZeneca, etc are inching closer towards successful vaccine development, the production and widespread delivery may still take some time. Amidst the current risk-prone environment casting dark clouds over virus spread containment, economic growth levels and market performance, strategic exposure to tech stocks may be considered to reap in fruitful returns.

Some investment tips for investors seeking to invest in tech stocks!

While some investors are applying caution amidst fear that the tech sector has reached its top, the critical role digitisation is expected to play in post COVID-19 era cannot be ignored. Following tips can be looked at while taking exposure in the tech space:

  1. Investors can look at undervalued stocks with strong balance sheet position and robust business growth potential.
  2. Tech stocks, once considered as high-reward but high-risk, can now be tapped for consistent blue-chip growth and reliable dividends.
  3. Speculative stocks may be considered; players looking at either developing a new market or have a clear opportunity to disrupt entrenched leaders.
  4. Prudent decision based on fundamental analysis can be the key to success. Financial ratios such as P/E ratio, EPS can be looked at.
    • Tech stocks with the lowest 12-month trailing P/E ratio can be considered, showing you’re paying less for each dollar of profit generated.
    • High Y-o-Y EPS growth for the recent quarter suggests that company’s business is growing and is generating more money that it can reinvest or return to shareholders.
  1. Disruptive trends can move the stock up the ladder like AI/cloud computing stocks. Peripheral stocks such as entertainment or streaming related tech stocks can be accessed. E-learning stocks may be a good opportunity to tap.
  2. FAANGs might be at high levels. But any correction can bring opportunities for punting these stocks.
  3. The underlying focus for a lot of investors may also be to continue investing in brands that they have been using, especially the technology brands listed in the U.S such as NASDAQ-listed FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks.
  4. The decent performance of tech players in US earnings season also demonstrates brighter prospects for the sector:
    • In the second quarter, Amazon, Facebook, Apple and Google all beat earnings estimates.
    • Apple increased revenues by 11% from the same period a year ago. Earnings per share grew 18% over the same period.
    • Amazon’s sales surged by 40%, while net profit doubled.
    • Facebook’s revenues rose by 10% year-on-year.
    • By mid-July, Netflix had recorded 25% year-over-year growth in revenue.
    • Other tech giants recorded similar or better growth. Microsoft (NASDAQ: MSFT) saw its revenues rise by 13% on an annualized basis. Chipmaker Advanced Micro Devices (NASDAQ: AMD) recorded 26% growth in revenues annually.

ALSO READ: 3 D’s of Investing in Bad Times – Demystify market Directives while Diversifying Your Portfolio

The upcoming reporting season is anticipated to fare well for the AU technology industry as well that has stayed at the forefront in the coronavirus era to drive business innovation and sustenance.

Exposure to income winners, established growers or disruptive trend-based players can be taken considering risk appetite and return expectations. One must avoid engaging in short term trading strategies with an unsuccessful approach to time price trends.

Some popular tech stocks with robust growth potential!

  1. FAANG stocks have observed a tremendous recovery between 36% (Netflix)- 89% (Apple) since stock market crash on 23rd March 2020.
  2. The WAAAX (WiseTech, Afterpay, Altium, Appen and Xero) shares are up between 35%- 715% since stock market crash.
  3. Buy now pay later player, Afterpay Limited (ASX:APT) has built its repo as Asia’s hottest tech stock, by soaring over 700 per cent since March 2020 crash.
    • A shift to stuck-at-home shoppers and digital payments seem to have bolstered expectations for Afterpay as it expands across the UK, US and Canada.
  4. Human resources technology company, Xref Limited (ASX:XF1) attained solid sales in June 2020 quarter despite turbulent and disrupted market conditions across globe.
    • COVID-19 has accelerated global demand for remote working and, consequently employers' desire to improve governance is increasing and they are seeking improved ways to perform candidate verification.
  5. Besides winning streak for ASX Tech Stocks: Pushpay (PPH), Sezzle( SZL), Openpay (OPY), Splitit (SPT) and Xero(XRO) deserves closer attention.
  6. Industry players such as 3P Learning has seen a surge in demand for its online courses during the Covid-19 crisis, whereas OpenLearning has lately inked a deal with Australian Catholic University to deliver online education for three years.

While market continues to be driven by mix of socio-economic factors amidst grave health crisis, investors needs take prudent calls while cherry-picking lucrative stocks with strong fundamentals, robust balance sheet and strategic outlook, keeping in mind long-term horizon.


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