The share market run from March up until the first vaccine announcement at the start of November has been unlike anything I’ve ever experienced.
During this time, any sort of traditional equity valuation method was thrown in the bin. How could you put a value on certain stocks that experienced such unprecedented growth?
It’s fair enough I suppose, but now that there’s slightly more stability surrounding the topic of vaccines and the US election, I feel as if it’s slightly easier to come to a conclusion surrounding the outlook and valuation of some of these COVID-19 beneficiaries in the tech and retail sectors.
Winners and losers
Since the first vaccine announcement, shares in Kogan.com Ltd (ASX: KGN) and NextDC Ltd (ASX: NXT) have both been hammered, tumbling 27% and 17%, respectively. Kogan had some additional corporate governance issues which caused a steeper fall.
In order to assess whether it’s likely or not that these companies will be able to continue on this rapid growth trajectory, there are a couple of important questions to ask.
Firstly, how much of this growth was fuelled on a once-off basis by superannuation withdrawals and government stimulus? Secondly, has COVID-19 changed consumer behaviour to the point where there’s now an ongoing structural tailwind?
In regards to Kogan’s outlook, we’re yet to find out if sales momentum drops off next year with no stimulus. However, I’d say it’s unlikely that superannuation withdrawals contributed to NextDC’s sales figures.
In a post-COVID world, how do the business models stack up for both of these companies? Kogan might do well despite being at the mercy of discretionary spending levels. The shift to online is definitely something that could play to its advantage.
In the case of NextDC, are we going to stop using data? I don’t think so, and management certainly doesn’t either, otherwise they probably wouldn’t be building new data centres with the help of a $1.5 billion debt facility.
With interest rates this low, you’d expect tech valuations to expand reflecting the cheaper borrowing costs, yet NextDC has suffered the same pullback as retail during the rotation into recovery stocks.
What’s the verdict?
I find it interesting that the valuations of two very different companies with different outlooks suffered the same fate recently.
While I can somewhat get a clear picture as to why for Kogan, I think NextDC might have been slightly oversold, which could now represent a buying opportunity.
With that being said, these sectors are volatile and you could expect more down days in the short-term.
For more reading on NextDC, check out my recent analysis of NextDC shares.
