Member log in

Tech bubble? Analysts see warning signs

Concern is rising at an apparent recklessness creeping into listed tech company investments.

Some market professionals and commentators are already calling it a bubble, with all the history and prejudices associated with such a word.

Others won’t go that far – but they’re still shocked at the money being thrown at technology companies, without basic research being undertaken.

Everyone seems to agree it’s a phenomenon brought on by Xero’s [NZX: XRO] stunning rise (justified or not), which has created a panic from investors who think they’ve missed the boat. Somehow they think they’re best-placed to pick the next success story.

Wynyard Group [NZX: WYN], SLI Systems [NZX: SLI], Snakk Media [NZX: SNK] and GeoOp [NZX: GEO] have listed this year and there seems a solid pipeline of tech prospects waiting in the wings.

But there are concerns that part-time investors, who are probably more used to pumping money into companies such as Telecom, are now warming to high-risk tech companies when they really can’t afford to lose their original investment.

Xero, which had a recent share price surge on news of a $180 million capital raising, has a market cap of $3.76 billion, making it one of the country’s biggest companies.

Yet, this is a company which is yet to turn a profit and, according to Thursday’s cashflow report, had revenue of $28.7 million for the financial year’s first half, while lifting its quarterly cash burn to $13.1 million.

Tech company potential at those multiples are clearly making some advisers uncomfortable.

Compare Xero to retirement village operator Ryman Healthcare, which has the same market value. In the 12 months to March 31 it made an underlying profit of $100.2 million.

Fresh pause
What seems to be giving market watchers fresh pause this week is tech firm GeoOp’s NZAX debut.

The baby of Leanne Graham (ex-Xero), the company finished the week at $2.50, $1.50 above the offer price, with a market valuation of $68 million.

This from a company which had revenue of $124,000 for the year ended March 31 and recorded a loss of $312,000 in that financial year. By September it had 4500 customers.

GeoOp ticks the right investment boxes, it seems.

Tech industry commentator and investor Ben Kepes says he was told by a friend, who successfully raised money recently, if you want your New Zealand tech company to resonate with investors there are three key words you need to include in your pitch: Xero, cloud and Saas (software as a service).

GeoOp can tick all three boxes, while also having the added appeal of a high-profile chairman, Mark Weldon.

(It’s worth noting Mr Weldon managed to snare 2.56 million shares, or 9.4% of the company, when NBR ONLINE has been told the experience of average investors is that they were heavily scaled back. By Friday’s market close, Mr Weldon’s stake had appreciated by $3.84 million).

Mr Kepes is seeing warning signs. He says companies should be listing that have good fundamentals behind them.

“If we’re purely listing companies and giving companies good market caps because they are part of some kind of industry trend then there’s a huge danger there.”

Canterbury-based Mr Kepes, who has invested in 15 companies in the last few years, describes tech investments as “super high risk.”

His advice? “If you don’t understand it, don’t do it.

“I probably wouldn’t go so far as to say it’s a bubble but I think that there’s some shaky fundamentals in our market right now.”

Herd mentality
JB Were’s head of advice Barry McLauchlan isn’t so reticent.

He says the money being thrown at Kiwi tech companies reminds him of the kind of behaviour leading up to the wholesale collapse of internet companies in 2001.

“It’s like herd mentality. They see these great rises in the market and so you start taking phone calls from people who haven’t done any analysis on the company at all – they just don’t want to miss out.  That’s the makings of a bubble.”

The risk profile is high and the analysis is almost impossible, he says. But he’s big enough to admit he might be wrong.

“On the plus side of Xero is that they’ve got some pretty heavy-hitting, tech-savvy funds and people who have put some money into it who understand that sector, who have taken a pretty good shot at it.”

Meanwhile, Craigs Investment Partners adviser Gretchen Williamson says small tech companies coming to market are unlikely to attract any interest from analysts, making it hard for people like herself to give clients a recommendation.

“It’s very difficult when you go and pick up the annual report to say, oh OK, they’re running at a loss but they’re valued at $20-30 million. That doesn’t fit any other logic – it puts something like 60-70 times any revenue, so you have to be future thinking.

“It’s simply not possible for me to give a recommendation on a sector that’s really still quite fledgling in terms of monetising and success and who’s going to be the best.”

Her three top tips for assessing tech companies are:

  • Check the track record of management and endorsements from tech-savvy investors;
  • How much cash does the company have and how quickly will they burn it;
  • Recurring revenue helps predict future earnings, as opposed to one-off projects. Plus, it pays to check the margin on products.

Ms Williamson says there’s a different mindset with tech companies – it’s less about when it might turn a profit and more about how many customers it has and what value somebody else might place on it.

The money being thrown at tech companies reminds her of the mining boom. A company merely taking a passing interest in iron ore seemed to experience a share price rise, she says.

All in all, it seems a bit of a guessing game.

And JB Were’s Mr McLauchlan says uncertainty over tech stocks is making his firm more conservative.

“I would invest my clients’ money like I invest my money. I wouldn’t be putting my money there [in newly-listed tech firms].

“One of our jobs as an adviser is to understand the downside risks for clients. And we just do not know whether Xero is a $30 stock or a $10 stock.”

More by David Williams

Comments and questions

You have got to be joking. Surely everyone has learnt the lesson and won't rush into investing without thorough research. Are people's memories as short as the proverbial goldfish? I hope not.

Irrational techuiasm is here. When the music stops it is going to be messy. Diligent and Xero are the only ones making serious money and have cash out their ears. They will survive but of all the tech stocks listed only Diligent will ever justify its current share price because it is currently very profitable and will stay so - even with restated revenue accounts. In tech stocks it should always be based on analysis of cashflow statements from operations. Only Diligent stacks up - the rest look ugly and when the music stops and they can't raise capital there is going to be years of tears.

I have mates who are rushing in to buy anything if it has something to do with the Tech sector. They even got in on Xero at +$20. I assume they are pretty typical. It's a bubble all right.

I just can't get over the GeoOp valuation. We either have some extremely well informed investors, or a bubble.

Well the problem is that although some people do do 'research', it's either muddled at best or straight out incompetent at worst - they don't understand the business or the information they have seen and what it means, but think they do - and they then rush off to invest because their 'research' tells them they are onto the next hot stock that has a great future. That everybody else is jumping on to it too gives them confidence that they and their 'research' are on the right track.

But what many don't realise is that just because the share price has gone up it doesn't make them right, a realisation that they may come to when it's too late.

It all makes perfect sense - until sadly, it doesn't.

Everything is a Bubble thanks to the Feds QE and bubbles...........

NZ tech can take on the world! No tall poppy syndrome here. Valuations are another matter...

Any stock lending activity for shorts occurring within these stocks?

How depressing. We finally see serious capital flowing into a burgeoning export technology sector and already the hand wringing has begun.

I bought into Xero at the IPO and sold out at $25, didn't want to get caught up in my own greed -which is a problem. Only other company I'm interested in is Snakk Media, the other ones seem too be very much long term and I don't understand how profitable they will be. Snakk Media however already have mobile advertisement campaigns with Pepsi Co, Intel and now talk of an Apple deal to advertise iPads and iPhones on Android devices? So I've put a bit of money into them.

At the end of the day it's speculation -this isn't investing. If your portfolio is all tech stocks or speculation, it's time to turn some of those speculations into investments of value.

GeoOp is extremely risky. Our due diligence reveals that the product is up to the mark, the tech team is very competent, the management team limited, the board a balance between Weldon's experience and the two newcomers. The key to GeoOp is that it is a mobile application, not a cloud application (although cloud forms part of the infrastructure). Mobile is the coming technology. You heard it here first.

Mobile is the coming technology? Lol, hello from the year 2013!

The stock market is driven by greed and fear.
Obviously a high risk investment area.
Enter at your own risk.