Why I'm doubling down on tech in '22
Many tech stocks have been hit hard recently, particularly mid-cap stocks have seen dramatic drops in stock price. The below is the Wisdom Tree Cloud 100 index (WCLD) which has seen a ~10% drop over the last 6 months.
DocuSign, a stock I’ve held since the IPO, dropped ~50% in December from its all-time highs. This type of drop is generally saved for frauds, major recessions, or dying companies so it spooked me a little, especially with every media outlet heralding the ‘rotation out of tech’ for investors.
When material changes like this happen, I’ll take some time to review my investment strategy and test my resolve. My portfolio is mainly made up of mid to large-cap tech so this has directly impacted my pocket.
Having thought hard about the pros and cons, I’ve written a summary below of the key points - outside of ‘tech multiples/valuations are high’ I couldn’t come up with any cons, but the below are the reasons I’m more bullish on innovative tech companies than ever before.
Gen-Z, the next generation of consumers, have grown up with digital devices and high-speed Internet. They expect a frictionless experience, transparent process, and mobile accessibility. Tech companies are successfully building and catering to their needs.
The reality is that millennials and boomers are now expecting the same, this trend has been accelerated by the pandemic where non-tech natives were forced to leverage online deliveries, vaccine appointments, virtual conferencing etc.
Consumers aren’t going back to 7-10 day deliveries, trying to order take out over the phone, calling a cab and hoping it turns up. Tech has made the consumer experience infinitely better and it is here to stay.
The companies optimising for these building the best experiences, or providing the tools and infrastructure to make them possible, are largely tech companies I try to invest in. So I feel pretty good about this trend.
Traditional Enterprises will spend on tech anyway
I tried to imagine that this investor rotation out of tech into more traditional companies is based on sound logic (inflation and higher interest rate environment benefits them)l, and even in that scenario, I see those traditional companies spending the additional money they make with tech companies. New customer acquisition with Google and Facebook, increased customer data storage from those customers with AWS and Microsoft, improved data insights, security, customer engagement etc. - these are all going to be tech companies benefiting.
There are companies where this isn’t necessarily the case - oil and gas, utilities and other commodities and essentials might not be investing in tech at a comparable rate, but any company with a product which touches a consumer (who are expecting the experience described above) is going to be spending more next year with tech companies than they did this one.
Compounding SaaS revenues
A Large percentage of my tech investments are in B2B SaaS companies like Docusign, Twilio,Crowdstrike, Amplitude etc. Unlike most traditional businesses, SaaS companies operate on a subscription model and, for the good ones, most of their customers continue to subscribe year over year. McDonalds or Coca-Cola have to sell their product every time it is consumed but a SaaS company can sell their product once and get paid for years.
Great SaaS companies also have positive net retention, often 120-140% annually, which means not only do their existing customers continue to subscribe but they actually pay 20-40% more every year. This level of compounding interest is VERY attractive over a decade, even if the expansion numbers decrease - which we haven’t seen materially occur. Without factoring in new customer acquisition these are often growth machines. Now consider that they’re also acquiring significant new customer revenue, which will add to the compounding over time, and you’ll understand why the math on these companies make so much sense - even if the multiples do seem so crazy.
So to summarise, I liked a lot of the companies I bought at 30x revenue multiples and I love them at 5-15x!
With increased inflation being a sure thing, holding cash isn’t an option. I’m buying, and maybe I’m wrong, we’ll find out in 10 years!