The Afterpay Touch Group Ltd (ASX: APT), Serko Limited (ASX: SKO) and EML Payments Ltd (ASX: EML) share prices posted massive gains on the ASX today:
- APT share price: up 29%
- SKO share price: up 53%
- EML share price: up 33%
It’s another wild day on the Australian share market for investors, but especially those in more small and mid-cap technology stocks.
The thing is… the stocks which bounce the hardest are also the riskiest.
“The stocks which bounce the hardest are also the riskiest.”
In six months from today, I’m confident the ASX companies which we look back on and say “wow, that was a steal” will also be the companies that were on the brink of collapse.
I’m not saying EML, Afterpay or Serko are going to collapse. I’m speaking in general terms about indebted or leveraged businesses.
Not only do “risky” companies tend to have debt (EML) and working capital financial risk (APT, SKO) they also tend to be the companies which are most difficult — some might say impossible — to value, since the range of outcomes are very wide.
In this video, I explain step-by-step how some investors value technology shares.
As I noted in detail earlier this month in an article titled “The real reasons Afterpay shares are down”, anyone who is attempting to value Afterpay shares right now has their work cut out.
That’s because it’s virtually impossible to be certain what Afterpay shares are worth because how do you measure its credit risk when no-one can shop in-store and we’re experiencing a surge in unemployment? Take it from me, I’ve created a value investing program in the country, it’s not easy to value tech shares!
What now?
I think it’s too early to start buying Afterpay, Serko or EML shares. As promising as these small companies are, we’re still weeks away from knowing how these companies are going to cope during a complete lockdown or as unemployment spikes and credit grinds to a halt.
If I was looking for shares I’d be looking exclusively at companies with rock-solid balance sheets, wide moats and those offering sticky products which people can use from anywhere — even in full lockdown. I’ve listed three such companies in my free investment report below.
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Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.
