Will ASX tech stocks crash in 2021?
A vaccine-led economic recovery through 2021 continues to look promising as evidenced by the recent rise in long-term government bond yields in the US, and here in Australia.
There’s an inverse relationship between the demand for bonds in the secondary market and their yield. In times of economic crisis, the demand for bonds increases as they’re considered a very safe investment with little default risk, which increases their price and pushes down the yield.
However, as the world continues to make progress overcoming the COVID-19 pandemic, long-term yields have increased as demand for bonds dropped, potentially signalling investors are more optimistic about the future.
No-one knows for certain how this will affect the broader stock market. However, it’s generally accepted that growth companies are more exposed to rising interest rates compared to more defensive sectors.
Higher interest rates increase a company’s cost of borrowing debt, making the company’s shares worth less today. Growth and technology companies are quite often expected to generate future cash flows in many years to come, meaning there’s a larger discount effect when valuing the company’s shares using a discounted cash flow analysis.
Due to these cashflows being far into the future, it also means they’re more sensitive to even small changes in the underlying discount rate.
What now?
I’m not making any bold predictions of what might happen in the coming months/year. But yield curves can be useful to get a sense of general optimism.
Again, timing your purchases around the market cycle could mean potentially delaying your purchase for several months or maybe even a year, waiting for a much-anticipated market crash that may never occur.
Some of the most fundamental principles that underpin the Rask investment philosophy are accumulating high-quality assets with a long-term outlook. That is, not short-term trading based on current stages of the market cycle.
Part of this approach also involves making as few investment decisions as possible and either focusing on a high conviction or a diversified portfolio, depending on your investment knowledge and temperament.
If this is the sort of investing strategy that you also align with, the best time to start investing might be today. Regardless of what happens in 2021 and beyond.
If you were to buy shares today and bond yields rise to the point where valuations are dragged down – so be it. It might be a good opportunity to buy quality investments trading at significant discounts.
Conversely, if valuations aren’t affected, that’s also fine since you have the advantage of time — being in the market for longer tends to improve returns.
All that being said, here’s one tech share that I’d consider buying today — or in 6 months’ time if the market was to crash.
My pick – Altium
I consider Altium Limited (ASX: ALU) to be one of the highest quality businesses on the ASX. Its strong competitive position, borne from the sticky nature of its product offering, is compelling. Learning how to use software for printed circuit boards (PCB) is expensive and time-consuming.
So once a business is familiar with a particular piece of software, switching costs become increasingly high, making future revenue extremely consistent due to their recurring nature.
There’s something else that makes the investment thesis behind Altium even more compelling in my view.
Altium 365 is the latest weapon in the company’s arsenal – a cloud-based platform that allows multiple stakeholders to collaboratively work on a single project in real-time.
The idea here is that all aspects of the PCB design, manufacturing, procurement and distribution are completed on one platform. This is a potential game-changer, as the company has primarily focused on the PCB design aspect in the past, the total addressable market has now expanded significantly.
This is the long-term vision of the company that is yet to play out, but if everything goes to plan, there’s a potential network effect here that could catapult Altium’s success.
If Altium 365 positions itself as an industry standard, it could reach a point where PCB manufacturers and distributors are highly motivated to use Altium’s platform as its value continues to rise as the userbase grows.
Right now, Altium is still in the process of transitioning its customers from a perpetual licence model to a more flexible software-as-a-service (SaaS) model. From what I’ve seen from other companies that have made similar changes in the past, this often results in a temporary slowdown in sales as less revenue is recognised upfront, and it takes time to reap the rewards of recurring revenues.
Regardless of what happens in the market, this is one I’d be happy to buy today and accumulate more of in the future.
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