COVID-19 has made us think about many strange things, like who are the 8% of people that believe that COVID-19 symptoms are due to 5G, and do you put the toilet lid up or down when you flush (a recent YouGov poll has highlighted that 53% leave it up, 43% put it down, and 4% don't know). It’s also led to some strange things happening, like a $0 budget film topping the US box office with $25k of weekly sales (Unsubscribe is a horror movie shot entirely on Zoom), and markets declining by 20-30% in March to then rebound 20-30% by the end of April.
On that last point we can use the 6 year history of our finnCap Tech indices data to put the recent moves in prices, growth, and valuation in context. What we’ve seen so far in 2020 is a move to all-time lows for forecast growth:
Yet strangely, multiples are trading at or near all-time highs, as measures such as quantitative easing enable investors to look through the near-term turbulence:
Over the past 20 years, most FTSE All-Share multiples hit their maximums in the dot-com bubble in 2000: 21x P/E, 13x EV/EBITDA, and 2.5x EV/Sales, but with sales growth of 9-10% and EBITDA and EPS growth in the high teens. The lowest multiples all came near the start of the financial crisis on 10 October 2008, with 6.6x P/E, 4.5x EV/EBITDA, and 0.8x EV/Sales. Growth rates then hit their lows in early 2009 with -21% EPS growth, -11% EBITDA growth, and -9% sales growth. So, to currently see multiples near all-time highs with forecast growth near all-time lows makes this situation a strange place to be. Notably the All-Share is now its most leveraged at 2.1x ND/EBITDA, and while this is partially to do with everyone’s favourite accounting policy of IFRS 16, this also makes our tech index constituents look attractive with their continued net cash positions.
We can’t speak for other sectors – but we reiterate that tech software and services providers can and will benefit from COVID-19, and in delivering valuations which are factoring in a return to business as usual, there is logic, and room for upside if COVID generates growth on a comparatively accelerated trajectory. Outcomes should be digital transformation accelerating, software and platforms becoming even more important, and connectivity, communications solutions, and security remaining essential. We focus on the likely beneficiaries in this week’s tech quarterly “COVID-19: Valuations in Tech”.
While COVID-19 hasn’t been what anyone wanted to start a new decade with, we feel many tech stocks have and are managing the disruption well. This fits with what the broader UK population are saying, with 91% of us feeling like we've handled lockdown fairly well, and 32% saying very well. This probably includes at least some “Great British spirit”, with 64% also supporting the reopening of venues like pubs and restaurants this weekend. For those of us that venture out for the first time in 102 days it will be a surreal experience of our new ‘one metre plus’ world, with an even greater reliance on connectivity, and possibly even 5G without symptoms.