Talking Points This Week: Big Tech Or Small, All Fall Down

After rewarding Big Tech richly in the pandemic era, and indeed the whole of the previous decade, Wall Street is casting doubt on the sector's ability to maintain the momentum needed to justify the erstwhile high valuations, which skyrocketed due to the Covid-induced unprecedented demand for new technology.

Tepid results from Amazon.com Inc., which was set to plunge double digits on Friday, and some of its biggest peers suggest a long-awaited rebound could remain elusive. The corrective moves are not restricted to this quarter alone. These stocks have tumbled significantly in 2022.

Picture this: Meta Platforms Inc., the biggest wealth destroyer among the top megatechs, has seen a market cap erosion of over 70% from its 52-week highs. And while the others have not had such a steep correction, they have all slumped.

What rivals these companies are the corrective moves in the new-age tech platform companies in India. Sure enough, the Indian IT services companies have fallen as well, but the Nifty IT index at large is flat year-to-date. Contrast that with the platform companies, most of which came out with their IPOs in the recent years, and the picture is starkly different.

Having plunged 50%, Delhivery Ltd. has eroded wealth. And it's one of the better performing stocks YTD. Surprised? PB Fintech Ltd. has slumped 74% from its 52-week high; Zomato Ltd. has tumbled over 60%, and Nykaa (FSN E-Commerce Ventures Ltd.) has not fared too well either.

Is this a good time to buy? The opinions are split right down the middle. Higher yields and rising cost of capital anyways pricked some of the valuation balloon (I won't call it a bubble).

Remember, rising rates tend to hurt growth stocks (read: tech stocks) due to their high price-to-earnings ratios and low-dividend payments. Higher rates can slow down businesses' cash flows and stunt reinvestment into innovation and growth prospects.

Abhay Agarwal of Piper Serica says: "The new-age platform companies, especially in the D2C and online services space, are seeing increasing competition from new players and also from erstwhile pure offline players. Technology has ceased to be a competitive advantage. The pressure is now to build a real business with a clear path to profitability. We see many leaders in this space floundering in their mission to become a real profitable business."

Agarwal believes that investors who earlier paid a premium valuation for high growth are now worried that these companies will run out of money before they get to cash breakeven, and therefore, there will be pressure on the valuation of these companies over the next 12 months. There are investors who believe otherwise as well. And maybe, there could be a good argument on that front too.

The valuations, whichever way you slice and dice, have improved, and a case can be made for companies like Nykaa (profitable business) or Delhivery (talking about an Ebitda breakeven by 2024) or a Zomato (aiming for profitability). But issues remain.

Vikas Khemani, an astute investor who bought Indian IT services at lower valuations and laughed all the way to the bank, is not keen on the platform companies as yet. He believes there is still froth and many business models need to be proven on the profitability count. He believes many of the so-called new-age businesses will not survive/stay listed, but is positive on how the next cycle will see many good companies being discovered, just like it happened in the post dotcom era.

The sell side continues to stay bullish. The chart above shows the average target prices in stocks, which are tracked by a minimum of 10 analysts, according to Bloomberg data. And as you can see, the returns, if these analysts turn out to be true, would be phenomenal. The problem: they have been wrong thus far.

Niraj Shah is Markets Editor at BQ Prime.