June 20, 2021

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Tech Sector Bulletproof to Frothy Valuation?

The stellar run up of Malaysia's tech sector in the past year is undeniably impressive. Long ago, Penang Island was regarded as the Silicon Valley of The East due to the vast numbers of international semiconductor companies which set up manufacturing hubs. This created an ecosystem where supporting ancillary industry to the key semiconductor players flourished. Ecosystem doesn't only mean facilities but talent pool is what matters. This is why Penang Island owe much to Tun Lim Chong Eu, the Chief Minister of Penang who laid the foundation to built an E&E powerhouse of Asia, all within the confines of a small island in Malaysia.

The argument for the case of technology company have always been their ability to disrupt existing businesses and create whole new markets or products which people never even dream of. This led to the creation of mega technology companies that dominate our every day life such the Facebook, Apple, Microsoft, Google, Netflix, Amazon amongst many others. Whenever people discuss about technology companies, I always liked the story of Amazon. Amazon started as an online marketplace for books, which then evolved to an e-commerce giant to what it is today. What most people do not understand about Amazon (except those who are familiar with the technology sector) is the crown jewel in Amazon isn't even e-commerce but Amazon Web Services (AWS) - their world class cloud computing services. How it pivot is truly amazing but this is because of a visionary entrepreneur who could dream the world and execute it.  

Many people look at tech companies' glorious success with admiration without seeing those 90% that failed spectacularly. Many investors in the stock market, especially beginners succumb to the "Tech Halo". This means just because of a company is categorized or named (XX "Tech" Berhad) the stock price automatically demands a premium valuation. It is a beautiful misconception. However, savvy business owners or market operators would capitalize on this common misconception to slap the "Tech" branding on their company.

The world's most valuable companies are from the technology sector which have led to the growth of angel investing, venture capital and private equity to discover, grow and nurture companies from zero to hero. While the stories of geeks and nerds dominating the world over jocks and the popular kids in school is heartwarming, many only see the glamour and success. For the past one year, the best performer in the stock market would be tech stocks hands down. Some argue Glove companies did very well. It is my view that glove companies did very well for the company itself (company's own bank account) but not for the stock price considering the retracement from the peak price have been fierce, vicious and painful. Tech stocks on the other hand did well especially from the aspect of stock price performance. In fact, it did so well because of the "valuation / multiple expansion" which resulted the share price to surge to astronomical levels despite the earnings failing to catch up. Unlike glove companies, which the share price surge is more than justified, the same cannot be said for tech companies. Yet some quarter of research houses and market pundits were willing to be generous in their valuation of tech companies using various reasoning such as record low interest rate environment, PER is not a suitable valuation model, semiconductor shortage, 5G / AI catalysts etc. These justifications are not outrageous but as a fundamentalist, I realise over the years regardless which sector, business or companies one invest in, there is always a fair value and the share price will ultimately reflect its fair value. This is a constant and the variable is the timeframe. 

Now with global tech stocks and tech sector selling off, many retail investors who chased high or overly exposed to this sector are panicking wondering if they should take profit (if they are the fortunate ones) or cut losses. The question to ask ourselves as an investor would be - is the tech sector bulletproof to frothy valuation?

If one's answer is "YES", tech sector is bulletproof, then by all means hold.
If one's answer is "NO", then one has to be wise to analyzed the true value behind the company and not be blinded by the "Tech Halo".

In the event one has no prior investment in tech companies and would like some exposure, I am of the view to be selective in choosing the companies instead of adopting a broad brush approach of going for any and all companies within the sector. Even in the 6 companies logo shared above, not all are worthy of investing. I personally do believe any market weakness offers opportunity for accumulation but this would be the best time to find your winner from the lot. 

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For link to my new book - "Once Upon A Time In Bursa", please click HERE :

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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.