3 tech stocks wrecked by the market this month

Australia’s darling telecom stocks have fallen out of favour over the past month or so. After a rampaging 2015 lead by a number of mega-mergers in the sector, is this a normal pullback? Or is something more going on?

source: Google Finance

source: Google Finance (click to enlarge)

As we can see, the losses have been particularly acute for Vocus Communications Limited (ASX: VOC) and TPG Telecom Ltd (ASX: TPM) over the past month. It’s not a coincidence that these falls came so soon after results season.

Furthermore, we can see that Vocus and TPG are a long way from highs of $9.40 and $12.93 that they hit earlier this year.

source: Google Finance

source: Google Finance (click to enlarge)

What’s going on?

First, valuations were probably overly optimistic earlier this year. TPG and Vocus have grown rapidly by acquisition, but by now most of the bigger telecom players have been consolidated – meaning big acquisitions should be less likely going forwards.

TPG has widely been tipped by the media to buy either Vodafone or Optus but seeing no sign of that in the latest annual report may also have let some air out of the balloon.

Secondly, organic growth just hasn’t been that good. Subscriber growth has slowed at a number of the telecom companies and Average Revenue Per User (ARPU) has remained flat – probably due to the maturity of the Australian market. The NBN roll-out and subsequent competition for customers also provides an opportunity to upset the status quo, although TPG has a very strong brand in the recently acquired iiNet. Cost savings from acquisitions have probably also played a part in the profit growth that has been achieved.

Telstra shares have also taken a hit after it flagged an upcoming multi-billion dollar hole in its earnings after the completion of the NBN in 2020. Combined with a number of other risks, some investors have come to view it as too risky. It’s worth noting however that Telstra is substantially cheaper in a Price to Earnings (P/E) sense than TPG and Vocus are.

Is the sell-off an opportunity? 

I think over the long term, tailwinds from increasing household connectivity and the ever-rising demand from data will bode well for the telecom companies. TPG and Vocus both continue to invest in fibre as well as acquisitions, and TPG is looking at expanding into Singapore. Over the next 10 years both companies will probably justify today’s prices. However it looks as though future growth will be much slower than it has been in the past, and investors will have to be careful not to overpay.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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