The technology sector was the market darling during the pandemic, but it has inflicted a lot of pain on investors in 2022.
Even the generals have been shot in this skirmish: Amazon (−32.4%), Microsoft (−18.4%) and Apple (−17.8%) are all dealing with the challenge of low earning yields (due to high multiples) at a time when the risk-free yield is rising. Even the best companies in the world need to offer an equity risk premium, so yields must go up and that means prices come down, especially when earnings are under pressure.
Social media platforms are deeper in the red. Meta (−42.4%), Pinterest (−44%) and especially Snap (−66.6%) have had a terrible year. At −5.8%, Twitter has been propped up by Elon Musk’s potential acquisition of the company. A great deal of advertising spend has returned to traditional media channels after flooding social media networks during the pandemic, as confirmed by recent updates from local counters African Media Entertainment (AME) and eMedia Holdings.
In the year ended March 2022, eMedia (owner of e.tv, YFM and other assets) reported a 39% year-on-year increase in TV advertising revenue. AME (owner of Algoa FM, OFM and other media assets) expects headline earnings per share (HEPS) to more than triple during the same period.
Before we move on, there are notable exceptions to this shift away from social media. LinkedIn (owned by Microsoft) reported a 34% year-on-year increase in revenue in the latest quarter. YouTube (owned by Google parent company Alphabet) grew revenue by more than 14% year on year in the latest quarter. LinkedIn is a niche business and YouTube practically competes with TV channels these days, which may explain the decoupling from more typical social media firms.
The tech sector is primarily a victim of silly valuation multiples towards the end of 2021, rather than low-quality underlying businesses
It’s easy to assume that all is lost in the tech space and that nothing can be bought in this market. The truth is that the sector is primarily a victim of silly valuation multiples towards the end of 2021, rather than low-quality underlying businesses. There are plenty of companies with questionable business models and poor unit economics in the industry though, made easier to identify by the existence of ARK Invest fact sheets.
Right here on the JSE, we have a few technology firms that offer something different and interesting. Importantly, the valuation multiples are far more reasonable, as these companies are completely off the radar for US investors and the asset price bubble that was created by stimulus. In fact, these companies are off the radar for most SA investors.
Capital Appreciation (Capprec) has lost 5% of its value this year. While that is clearly not a happy story, the share price is double where it was at the start of 2020. In the US, many companies have given up most or all pandemic gains.
With a market cap of about R2.2bn, its core lies in payments and software verticals, with interesting acquisitions in frothier areas such as cloud and even Web 3.0. A pre-close update in April suggests HEPS growth of 25%–35% in the year ended March 2022. This puts the group on a p:e multiple of about 12.5, which doesn’t seem too demanding for a tech business that generates strong cash flow and (wait for it) pays dividends.
There’s an even smaller tech group that has managed to buck the market trend and deliver strong share price returns this year. Data specialist company PBT Group is about R40m short of the R1bn market cap milestone and the share price is up 17.4% this year, an astonishing result in this market.
With results for the 2022 financial year due in June, PBT is in the right industry at the right time. In the six months to September 2021, HEPS grew by 64.9% to 34.96c. An interim distribution of 25c was declared and a special distribution of 30c was announced last week. The 2021 final distribution was 22c, so if we assume a reasonable growth rate on that number for 2022’s final distribution, it’s been a bumper year for shareholders. Even without the final dividend, the yield on the current share price from the interim and special distributions is 6%.
This is the point: the tech sector isn’t broken. The valuations were broken. On the JSE, you can find tech companies doing exciting things and paying proper dividends along the way. You just need to be prepared to look in Sandton and Cape Town instead of San Diego and Cupertino.
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