Is the new age tech bubble bursting?

Some of these stocks became multi-baggers for those who maintained it over the next decade.

Fast forward to 2022. Tech stocks are falling again. This time it is a new age.

Shares of FSN E-commerce Ventures Ltd (Nykaa), One97 Communications Ltd (Paytm), CarTrade Tech Ltd (CarTrade), and PB Fintech Ltd (PolicyBazaar) fell anywhere between 49% and 63% from their 52-week highs are below. February 18, BSE figures show. On a year-on-year basis, while the Sensex has narrowed losses and is down around 1%, Paytm, Nykaa and Zomato are down 38%, 33% and 37% respectively.

Looks like it’s not just about India, more like a 2000-01 statue. Globally, the Nasdaq Composite Index is down more than 14% year-on-year. Popular Nasdaq stocks that have taken a dive are Facebook (39%), Amazon (8%), Tesla 20%, Netflix (36%) and Microsoft (15%).

All this begs the troubling question: is this the beginning of a technological bubble bursting like the one we saw in 2000-01?

Some market watchers believe it is. The enthusiasm driven by the plethora of liquidity in Internet stocks seems to have faded. Analysts haven’t ruled out further improvement. Some tech stocks, they have, are still trading at “crazy” valuations after factoring in the recent decline. However, he declined his comment saying that comparison with 2000-01 may not make sense as the reach and use of the Internet is much wider now.

“2022 is not like 1999. The difference is that now, the Internet is a part of everyday life. We cannot live without it. While many tech companies have fallen, the good ones will bounce back once they demonstrate profitability,” says Neil Behl, founder and CEO of Negen Capital PMS, a portfolio management services company.

Other analysts agree with Bahl on the profitability metric.

“The year 2021 saw listings of some established new-age companies, but the reality check is profitability,” says Amit Chandra, assistant vice president, HDFC Securities. “The market will not value a franchise until the path to profitability is clear.” adds up.

Innovation on sale?

Surviving from the dot-com bust wasn’t easy—even for profitable companies.

According to calculations by Morningstar, a financial services firm, it took Wipro 14 years to cross its dotcom bubble peak, compared to the Sensex, which took almost two years. Infosys and Tata Alexi crossed their dotcom peaks in five years, while Sonata Software and Zensar Technologies took 13 and 12 years, respectively.

According to data from Negen Capital PMS, it took a decade or more for companies like Microsoft, Amazon, Priceline, Adobe, IBM and eBay in the US to make a comeback after their dot-com bubble peak.

Meanwhile, many firms such as Lucent, Nortel and WorldCom, which seemed strong at the time, have either merged with other companies or no longer exist.

At the same time, experts see a good buying opportunity.

Speaking about the recent fall in tech stocks, US-based fund manager Cathy Wood, known as a ‘star stock-picker’ recently said, “Innovation is on sale.”

Wood is known around the world for picking up disruptive companies on Googles and Facebook. The top five holdings in their flagship fund, the ARK Innovation ETF, include stocks such as Roku, Zoom Video Communications and Coinbase. Tesla is at the top.

He may have a point. In the US, which is a more mature market for Internet companies, the top five US companies by market cap included General Electric, AT&T, Exxon Mobile, Coca-Cola and Merck & Co in 1995, data from brokerage Motilal Oswal showed. Is. He has assigned pole position to tech companies like Apple, Microsoft, Alphabet, Amazon and Tesla. Cathy is already looking beyond existing ones to bet on new tech firms.

In India’s case, Bahl of Negen Capital PMS believes that older stocks will struggle to catch up with high-growth companies. “I don’t know who will be the eventual winner, but they will dominate the Nifty,” he says.

He touted the recent correction in tech stocks as a generational opportunity to capture some growth stocks at fair valuations. “It may improve further, but this will give you an opportunity to average out your purchase price,” he said.

He sees opportunities in areas such as e-commerce (particularly video commerce), music, gaming, e-sports, software as a service (SaaS) and the metaverse.

new metric

Internet companies have different business models. Since they are making losses, their success lies in revenue growth. Investors also need new valuation metrics.

“Extreme growth in revenue is the key to success for such companies. Losses can be wiped out only when revenues hit a critical mass, driving and financial leverage,” Motilal Oswal Financial Services Ltd recently said in the ‘Atoms to Bits’ – Said in a report titled ‘Wealth Creation in the Digital Age’.

So, how do investors identify a revenue growth maker?

“Investors should look at valuation metrics like price-to-sales or price-to-revenue,” says Dhaval Kapadia, director-portfolio expert, Morningstar Investment Advisors.

Market cap divided by sales is price-to-sales. The lower the ratio, the better the company will be in terms of valuation. “If you are paying 15-20 times the price-to-sale for a company, you are entering the stock at an expensive level,” says Kapadia.

The price-to-sales ratio, however, does not consider changing rates of sales growth. For example, if two companies are rated at four times (4x) the price-to-sales, and one company is expected to grow sales at 20% and the other at 40%, then clearly the latter is better. . But the price-to-sales ratio doesn’t capture this. Therefore, experts suggest another metric – PSG or Price/Sales – for future sales growth rate.

“Thus, in the above example, the first company has a PSG of 0.2 (4÷20), while the second company has a more attractive PSG of 0.1 (4÷40),” Motilal Oswal was quoted earlier in the same report.

Data available from Screener, a stock analysis and screening tool, shows that Nykaa has a price-to-sales ratio of 28.4, compared to 1.56 for Shopper’s Stop, with both companies increasing sales by more than 30%. Why compare Nykaa with Shoppers Stop?

Nykaa’s quarterly earnings report shows that it has opened 12 new retail outlets, taking the total store count to 96 as of December 2021. Warehouse storage space is also expanding.

“Nayaka has a physical plus digital model but gets the valuation of a pure play e-commerce internet company. This can be compared with Shoppers Stop, which is trading at a much cheaper valuation.

Among other internet names, Indiamart Intermesh, which is listed in 2019, is citing a price-to-sales ratio of 21 even after a 30% drop from its 52-week high hit on 18 October 2021. However, the company has made a strong showing. Profit growth of 52.10% CAGR over the last five years, data gathered from the screener shows. Its return on equity and return on capital employed is also over 30%. Despite the recent round, the stock is up more than 300% from its listing price.

Info Edge, another profitable Internet firm, offers bids 42 times the price-to-sales. According to ICICI Securities, the stock is one of the top two contenders for entry in Nifty 50 (the other being Apollo Hospitals).

Nifty index is reviewed twice a year. The upcoming half-yearly changes in the Nifty 50 index can be announced this month.

time-tested metrics

In tech circles, the Amazon story is viewed with a certain astonishment. Its case studies are often touted to justify how a growth stock can reward investors. The company’s market cap has grown from $4 billion in 2001 to $1.5 trillion now. But there’s a catch. Its e-commerce business barely registers profits while Amazon Web Services (AWS) is the real profit generator. “In Amazon’s case, while most of the revenue comes from its e-commerce business, most of the profits come from AWS,” says Chandra.

Apple, too, diversified itself from the Apple II (home computer), the Macintosh, and then the all-in-one desktop, the iMac. Over the years, it introduced many new products and services including iPod, iPhone series, iTunes, AirPods, etc.

Indian new-age companies, too, need to diversify into profit-making ventures – beyond what they currently sell, as market watchers hold. Motilal Oswal says, “Such scale-up can happen vertically in existing businesses and/or horizontally in adjacent businesses and/or completely new businesses.”

Analysts also suggest tracking user growth. Companies can easily play up user growth statistics by influencing people to sign up for free or cashback. “If you provide a substantial economic incentive, it is possible for a large number of people to sign up and act on your website or app, which can then be counted as users to show growth. Will not generate real business. If anything, they will only slow down the business,” says Nitin Kamath, founder and CEO of Zerodha, a financial services company that provides retail brokerage services. Separate the wheat from the straw, he suggests.

capital puzzle

High liquidity, globally, fueled enthusiasm around new-age tech stocks. The liquidity pipeline is drying up with global central banks hinting at raising interest rates. This can result in a detrimental effect on companies that are in dire need of cash to run their businesses.

In such a scenario, growth companies have to reach a stage where they do not require fresh capital to expand their business or generate user growth.

“Old tech companies and survivors of the tech bust (2000-01) were of no avail. “He never needed fresh money, but only growth avenues to run his business,” explains Shyam Shekhar, founder of iThought, a financial advisory firm.

Not so with new age companies. “I don’t see any self-sustaining new age company at the moment. They will need capital to last for a few years until the growth is enough to make them self-sufficient.”

Therefore, capital self-reliance is something that investors should keep an eye on, emphasize the experts.

Typically, market leaders or those with a sustainable revenue model tend to round up capital when less money is chasing growth. “Keep an eye on companies that have raised capital. Their self-reliance in the next 12-18 months after raising funds will be a positive sign,” says Shekhar.

While the liquidity glut and high valuations of new-age companies reflect the tech boom of the past, the explosion phase may have just begun. It is too early to predict the bottom or survivors of the current tech bubble. However, in the end, companies with a clear path to profitability, may be the last ones standing.