Tech Wreck Version 2 - Australian Investment Education

Tech Wreck Version 2

The month of April was a tough one for investors, particularly those heavily invested in the technology space. While there is a broad scope of what technology companies do, Host Andrew Baxter has noticed some signs similar to what he saw before the dot com boom and bust of the late 1990’s. Join us in this week’s podcast to hear more:

Share Price and Business Outlook
The tech sector has been very much a hyped portion of the market for a long time. Investors over the last few years have been willing to pay more than they should for major tech stocks with the mentality of ‘it is simply going up’. Host Andrew Baxter explains that these stocks have not been good value at all and how we can tell. The PE ratio (Price to Earnings) is a widely used measure of the stock price relative to its earnings per share and is used to determine whether a stock is good value. For the most part, it takes into account the most recent earnings result. The typical ratio is about 13-17 times but of late stocks on average were trading at about 18 times their earnings per share. The key reason for this is the fact that many stocks are bought and sold on the basis of their potential growth and where they may be down the line. Using PE ratios as key analysis is problematic already, but doing so based on your best guess as to what a company might be worth in the future is highly risky. Markets are very fluid and it is very difficult to predict what will happen years in the future.

The Problems Facing Netflix
Of the recent earnings season, if there was one thing you’d have heard about it would be Netflix’s fall from grace. Netflix’s stock price had already been plummeting but news of decreasing subscribers has twisted the knife even further and the stock is down about 70% from its highs. Host Andrew Baxter explains some of the difficulties Netflix is now faced with after losing a great deal of its value already. Netflix was a pioneer in the streaming services space and for a long time has been the goliath name in the game. Now we see countless competitors in the market, many large enough to have a real impact on Netflix’s subscriber figures. Running a streaming service is an inherently risky business as large sums of money are spent with no assurance of any true return. Companies fork out big money to produce programming for their platforms regularly but there is no way to know for sure if these projects will have a positive impact on their subscribers. All in all there is a long road back for Netflix to be the streaming giant it was previously and it will be interesting to see what moves they make to get back to where they were.

Block’s Acquisition of Afterpay
Jack Dorsey’s Block, formerly known as Square, recently acquired Afterpay in a phenomenally large deal. About $30 billion US dollars is what Block was willing to pay for Afterpay, but Host Andrew Baxter  has some reservations about this. Afterpay’s business model is inherently risky, and the general consensus is that the purchase price probably exceeds what Afterpay is truly worth. As a company, Afterpay does not have any real earnings in the immediate future. Many users of the buy-now-pay-later services now available have overspent using Afterpay and have since adopted loans with interest, defeating the purpose of using Afterpay for consumers. Afterpay has done well to position itself not as a financial services company, but as a technological solutions company, escaping significant regulation. Block however, is a financial services company, and will possibly be forced to navigate new regulation on Afterpay should things change in the long-term. Increased regulation could spell disaster for the business, and turn what was an investment from Block into a flop.

Facebook vs Square
Previously Facebook, Meta Platforms is a company we are all very familiar with by now. Host Andrew Baxter compares this US market titan with something of an up and comer by way of Block (formerly Square). If we look at Facebook, we see an extended history of strong performance and competitiveness in the market. The main driver of their revenue is advertising space, which they dominate as they are notorious for acquiring their competitors as well as being the go-to for online marketers globally. If we look at Square’s original business, they are a bit of a one-trick pony. They pioneered a device for transactions, not dissimilar from Eftpos machines with Paywave. This makes them vulnerable to competition and potentially threatens their performance in the long-run. We can draw a parallel here with Netflix, the first big mover in the online streaming space which now finds itself losing popularity in a more contested market, so Block investors will be keeping a sharp eye on possible competitors and how their new business in buy-now-pay-later goes.