One stock expert has admitted he got it wrong last year but said that this means that right now, there are some massive buying opportunities.
“The way different sectors were impacted by COVID surprised me. A lot,” he posted on the company blog.
“Home furnishings boom? Nope. Motorbike retailer has best year ever? Nope. Funeral homes have their worst year ever? Definitely didn’t see that coming.”
The biggest surprise was the enterprise software subsector.
Johnson, as well as many other experts, expected that this group of tech companies would be relatively shielded from COVID losses.
“Unlike software sold to individuals or small businesses, where the user simply buys the product and starts using it, most enterprise software is heavily integrated into a company’s operations and customised for each client,” he said.
“They are almost impossible to remove, making for sticky revenues and attractive long-term investments.”
But a horrible league table of ASX-listed enterprise software makers shows their shares all currently trading significantly below their pre-pandemic prices.
“It turns out that this prediction wasn’t right either,” Johnson said.
“Apparently, some of the revenue isn’t as recurring or reliable as investors had come to believe.”
|Enterprise software company||Share price change
from 1 Jan 2020 to 21 Mar 2021
|Gentrack Group Ltd (ASX: GTK)||(62%)|
|Bravura Solutions Ltd (ASX: BVS)||(48%)|
|Integrated Research Limited (ASX: IRI)||(32%)|
|Livetiles Ltd (ASX: LVT)||(28%)|
|Infomedia Limited (ASX: IFM)||(24%)|
|Iress Ltd (ASX: IRE)||(24%)|
|Altium Limited (ASX: ALU)||(21%)|
|Appen Ltd (ASX: APX)||(20%)|
|ELMO Software Ltd (ASX: ELO)||(19%)|
|Nearmap Ltd (ASX: NEA)||(17%)|
|Readytech Holdings Ltd (ASX: RDY)||(6%)|
|Source: Forager Funds, table created by author|
Why are enterprise tech companies so cheap now?
Johnson attributed this group’s misfortune to the way revenues are received from clients.
“Most enterprise software companies earn significant amounts of upfront implementation revenue. That depends on winning new clients. And some of the ‘recurring’ revenue is related to clients requesting changes or introducing new features,” he said.
“With employees working from home and much bigger problems to deal with, most corporates have moved IT system upgrades down their lists of priorities.”
But he believes this now presents a golden opportunity to buy up these companies. Because they will come roaring back.
“The problems are real, but the share price reactions look overdone,” Johnson said.
“The timing of a recovery is uncertain. But the deals will return, and investor optimism will likely come back alongside them.”
The executive attributed both Forager funds’ outperformance in the past 12 months to “capitalising on widespread over-reactions, and being willing to change our minds as the evidence came to hand”.
“In the enterprise software sector, we’re doing both.”
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Tony Yoo owns shares of Altium, Appen Ltd, Elmo Software, and Nearmap Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium and Elmo Software. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Appen Ltd, Bravura Solutions Ltd, Infomedia, Integrated Research Limited, LIVETILES FPO, Nearmap Ltd., and Readytech Holdings Ltd. The Motley Fool Australia has recommended Bravura Solutions Ltd, Elmo Software, Infomedia, IRESS Limited, LIVETILES FPO, Nearmap Ltd., and Readytech Holdings Ltd. 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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