Beware the ASX tech wrecks

Seek Limited (ASX: SEK) founder and start-up investor Paul Bassat has warned about the number of ‘appallingly bad’ early-stage tech stocks that have listed ‘way too early’, according to The Australian.

Having looked at the performance of several new-age tech listings over the past year or so, I tend to agree that there are definitely some tech companies that may never become successful, while others could take many years before shareholders reap the benefits.

Mr Bassat has told The Australian that many businesses were short on relevant management experience, had a high level of complexity and had little capacity to forecast revenue. Some haven’t even got to that stage yet, more focused on building up their business.

By any measure, some of the valuations for these companies are egregious [outstandingly shocking],” says Mr Bassat, adding, “I don’t know how they’re being valued, but it’s clear they’re not ready to be listed. This is really only a problem in the Australian and New Zealand markets. Australia, in particular, has a culture of resources companies going to the market very early.

A number of resources companies have also switched to become tech companies, pushed by the fall in commodities markets.

The problem for investors is deciphering between those with the best prospects and those that might be duds. Mr Bassat has called on the ASX to adopt much tighter listing requirements for technology companies, with retail investors likely to be the biggest losers.

The following selected list of tech shares have all seen their share prices plunge this year, suggesting the market’s early enthusiasm for them has waned. That doesn’t mean that some won’t be successful, but does illustrate the dangers of investing in speculative tech companies. They are by no means alone either, many others are down 20%, 30% or more as well.

Company Fall YTD
1-Page Ltd (ASX: 1PG) -86%
Reffind Ltd (ASX: RFN) -78%
Newzulu Ltd (ASX: NWZ) -74%
Moko Social Media Ltd (ASX: MKB) -65%
Norwood Systems Ltd (ASX: NOR) -65%
Activistic Ltd (ASX: ACU) -64%
iWebGate Ltd (ASX: IWG) -55%
CV Check Ltd (ASX: CV1) -51%
Shoply Ltd (ASX: SHP) -50%
World Reach Limited (ASX: WRR) -48%
1st Available Ltd (ASX: 1ST) -41%
Big Un Ltd (ASX: BIG) -38%
Decimal Software Ltd (ASX: DSX) -40%
Rewardle Holdings Ltd (ASX: RXH) -37%
Migme Ltd (ASX: MIG) -37%
Knosys Ltd (ASX: KNO) -47%
Tomizone Ltd (ASX: TOM) -50%
Ahalife Holdings Ltd (ASX: AHL) -56% Ltd (ASX: RNT) -48%
Otherlevels Holdings Ltd (ASX: OLV) -30%

Source: S&P Global Market Intelligence, Yahoo!AU

However, the ASX has a conflict of interest here. By being the gatekeeper and the operator of the exchange, means it makes money having more companies listing on the ASX, and so it’s not in the exchange’s interest to set too high a barrier for entry.

As an example, Hong Kong requires companies to meet certain profitability benchmarks for listing, which is too strict, but the US Nasdaq’s metrics relate more to size and scale – which may be more appropriate for the ASX.

Foolish takeaway

Some of the companies in the table above could well go on to become market leaders and delight their shareholders. Some will muddle along consistently raising capital from shareholders without advancing and others will struggle to stay alive.

Investors need to be aware of the risks of investing in early-stage tech companies.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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