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Investor Spotlight: how Nasdaq affects Australian tech stock


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As the Nasdaq's giants sway, so do Australian tech stocks. Dive into the interplay of Nasdaq trends, rising bond yields, and the Australian tech sector's trajectory. Explore the key players and their potential in this landscape.

 

IG Analyst | Publication date: Tuesday 03 October 2023 03:10

Article written by Danielle Ecuyer

The global technology landscape is closely intertwined, with movements in major indices like the Nasdaq 100 having a ripple effect on technology stocks around the world. In this week's Investor Spotlight, we explore how the Nasdaq's trajectory and bond yields impact Australian technology stocks.

Tech titans and their influence on Nasdaq

The Nasdaq 100 index is dominated by a few mega-large companies which represent 43% of the index. At recent share price highs, they stood at a 50% weighting. Any movement in the tech behemoths - Apple, Microsoft, Amazon, NVIDIA, Meta, Tesla, and Alphabet, by market cap order, has a direct impact on the index.

These companies capture international demand as well as major secular trends, such as generative artificial intelligence.

Immense cash flow generation, strong balance sheets, even more so in this cycle, due to the refinancing of debt during the pandemic when financing costs were extraordinarily low, make big tech more defensive. Microsoft currently generates double the amount of income on its cash than it pays in interest servicing costs.

The valuations vary depending on the growth profile of the tech giants.

Meta and Google are considered as mature and cyclical due to their advertising spend exposure and trade on lower valuations than Apple, which is growing recurring revenues via its service operations; Nvidia is high growth due to the AI, GPU (graphic processing unit) demand.

 

bg_nasdaq_876183.JPGSource: Bloomberg

Nasdaq beyond tech

None of the magnificent seven could prove to be recession resilient, but investing is as much about the absolute as it is the relative performance. Although Nasdaq is perceived as a technology index, the Nasdaq 100 includes the top 100 largest companies by market capitalisation, excluding financials.

Higher bond yields depress the valuations of equities, and more so technology companies as they are perceived as higher growth, with longer-dated assets - meaning more growth in the future. The bottom line is Australian technology shares will, to a large degree, track the trends when it comes to rising bond yields (depressing valuations) and the Nasdaq performance.

September snapshot

For the month of September, the Australian Information Technology index declined -8.1%, and the Nasdaq composite fell -5.81%. Without splitting hairs, much of the divergence comes down to the composition of the indices and the performance of specific stocks.

The Australian Information Technology index includes Wisetech Global, Xero, Next DC, Technology One, Megaport, Life360, and Dicker Data, according to market capitalisation. These are just the largest companies, not a complete list.

Australia’s technology companies are not directly comparable to the US technology companies, but similarities exist in terms of theme exposures such as software services, data centres - secular themes (cloud services and AI).

What is probably of more significance is the steep selloff in US Treasuries and the rise in bond yields as a driver of the recent weakness in share prices.

Three stocks to watch

  • WiseTech Global: Rome wasn’t built in a day

Wisetech Global is a $22 billion company which offers global software services to the logistics industry.

WiseTech Global weekly chart

 

how-nasdaq-affects-australian-tech-stockSource: IG

FY23 results: Surpassing expectations but a cautionary note for FY24

In its recent FY23 results, WiseTech's results beat expectations; however, the company lowered expectations for FY24 due to the integration of lower-margin acquisitions.

Founder and CEO Richard White noted that in building out the land-based logistics services, any concerns over short-term margin compression fail to acknowledge the medium integration and full integration benefits over the longer term.

According to FNArena, the average share price target is $79.53, with Morningstar having the highest target at $95 per share.

FNArena forecast chart

 

how-nasdaq-affects-australian-tech-stockSource: FNArena

Refinitiv has a mean target price of $76.24, with 1 Strong Buy, 6 Buys, 7 Holds, and 1 Sell rating.

Refinitiv forecast chart

 

 

 

 

how-nasdaq-affects-australian-tech-stockSource: Refinitiv

 

  • Megaport: Riding the cloud wave

Megaport is a $1.9 billion cloud connectivity specialist currently undergoing a revaluation. The company is benefiting from cost reductions in FY23 and is expanding its headcount in FY24 to accelerate the development of its customer network.

Megaport weekly chart

 

 

how-nasdaq-affects-australian-tech-stockSource: IG

The future of cloud and NaaS

Goldman Sachs notes that the company "will benefit from strong structural tailwinds from the adoption of public cloud, including multi-cloud usage, and the transition towards NaaS technologies."

Citi believes there is potential upside risk to FY24 earnings as operations benefit from the growing adoption of cloud services and network-as-a-service.

FNArena has an average price target of $14.12, with Macquarie at $18.

FNArena forecast chart

 

how-nasdaq-affects-australian-tech-stockSource: FNArena

Refinitiv has a mean price target of $13.26 with 3 Strong Buys, 5 Buys, 4 Sells and 1 Strong sell.

Refinitiv forecast chart

 

 

how-nasdaq-affects-australian-tech-stockSource: Refinitiv

 

  • Xero to hero: Will the story continue?

Xero is a $17 billion software services specialist for the accounting industry, focusing on improving profitability through cost reductions and price increases, particularly in the UK market where the company's penetration rate is underdeveloped.

Xero weekly chart

 

how-nasdaq-affects-australian-tech-stockSource: IG

Xero's 1H24 results

Xero reports 1H24 results on November 2, and analysts will be seeking more clarity on earnings growth and resilience, margins, and the balance between subscriber growth versus price rises.

The FNArena average target price is $117.56, and Goldman Sachs is one of the most bullish with a target price of $147, and the stock is on their conviction Buy list.

FNArena forecast chart

 

how-nasdaq-affects-australian-tech-stockSource: FNArena

Refinitiv has a mean price target of $118.24 with 2 Strong Buys, 10 Buys, 3 Holds and 2 Sells.

Refinitiv forecast chart

 

 

 

 

how-nasdaq-affects-australian-tech-stockSource: Refinitiv

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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