Shares in technology companies in “stay at home” sectors such as e-commerce and teleconferencing have taken a drubbing over the past two days in the wake of Pfizer Inc.'s vaccine trial announcement.
While much of the market surged on the optimistic news about a COVID-19 vaccine, technology stocks in Canada and the United States fell hard on Monday and extended their losses on Tuesday. Shares of Shopify Inc., for instance, have fallen 15 per cent in the past two days, while shares of TSX newcomer Nuvei Corp. are down 8.9 per cent. The technology-heavy Nasdaq Composite Index is down 2.8 per cent so far this week.
Investors are suddenly trying to gauge how well quintessential COVID-era technologies – teleconferencing, online shopping, distance learning – will perform once physical-distancing measures end. Money is rotating out of high-growth tech stocks and toward cyclical industries that are set to benefit from broader economic growth. What’s uncertain is whether this latest selloff marks a significant turning point for stay-at-home stocks.
“There’s no question that whether it’s a Zoom meeting or a Teams meeting or you buying things online, that changed dramatically in 2020,” said Todd Coupland, technology analyst at CIBC Capital Markets. “The debate that investors will now have on e-commerce names, is how much of that pull forward [in revenue and earnings] is going to be permanent, in terms of a change in our behaviour.”
Mr. Coupland believes some shifts in consumer behaviour, particularly around e-commerce, will outlast lockdowns. But not every change will be permanent and “the outlook and valuations of those [online technology] companies, including Shopify, need to adjust for that,” he said.
So far market sentiment has turned negative on a broad range of Canadian technology companies. Shares of supply chain management company Kinaxis Inc. have fallen 19.4 per cent in the past two days, while shares of online learning company Docebo Inc. declined 15.6 per cent. Yet other tech stocks appear relatively unscathed: Shares of payment processor LightSpeed POS Inc., for example, are only down 1.5 per cent so far this week.
Over the course of the pandemic, investors have been willing to pay a premium for companies that can sustain or grow their revenues despite the lockdowns. With a potential vaccine on the horizon, this calculation appears to have changed, according to BMO Nesbitt Burns analyst Thanos Moschopoulos.
“It’s less of a question of a change to the fundamental revenue and earnings outlooks for these companies, it’s probably more that there was a premium being ascribed to these stocks that they are now losing a bit," he said.
Mr. Moschopoulos predicts that many technology companies that have performed well during the pandemic will continue to do so. At the same time, postpandemic outlook does vary depending on what services a company is offering.
“The dynamic around video conferencing will be different than the dynamic around e-commerce,” he said. "Certainly if we’re talking e-commerce, I would say there’s been a structural shift there. And generally speaking from an enterprise software perspective ... companies have certainly accelerated their move toward cloud software, and I think that persists postpandemic.”
There are other warning signs in the market this week for technology stocks. Bond yields have jumped in recent days as investors left the safety of government debt, pushing prices down and yields up. Historically, bond yields have had a negative correlation to technology stock multiples; investors tend to pay a premium for growth when interest rates are low, but are less willing to pay exorbitant prices when interest rates rise.
At the same time, analysts say investors should not overreact to the selloff or other warning signs in the market.
“The [technology] sector in general has performed very well year-to-date, taking into account the recent selloff," Mr. Moschopoulos said. "And I think there’s always going to be an appetite for companies that have a good track record and good growth prospects.”
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