This week City A.M.’s Charlie Conchie talks to Lorne Daniel, Technology Research Analyst at financial services company finnCap. They unpick a very rough quarter for tech companies and tech stocks, and go through what’s to come.
Charlie also takes us through the main headlines this week — multiple cryptocurrencies have plummeted in value, pressure is growing on the Treasury to greenlight the next stage of Buy Now Pay Later regulation, and Japanese investment giant SoftBank has announced a record $26.2bn loss.
Episode transcript (auto-generated)
Host 0:07 Hello and welcome to Tech weekly, a podcast by City A.M., where we go through the most important news of the world of tech, crypto FinTech and beyond. I’m joined today by City A.M. reporter Charlie Conchie. This week Charlie will be talking to Lorne Daniel Technology Research Analyst at finnCap, a financial services company. They’ll go through the tumultuous past few months tech companies have had after their pandemic highs and talk about where things are headed. But first, the main tech and fintech headlines.Charlie Conchie 0:39 Pressure is mounting on the Treasury to greenlight the next stage of buy now pay later regulation as concerns really grow, I think over the use of the products in the midst of this cost of living crisis that we’re in. We spoke with the former FCA boss Chris wielaard. This week, who authored a landmark review of the sector last year and he can reiterated the need for urgent regulation in the space and warned that the speed had slowed since January, away from the London FinTech firm paddle has bagged a $200 million funding injection at a valuation of 1.4 billion which makes it the latest UK firm to achieve the so called unicorn status of more than a billion dollar valuation. Pardo is a firm that provides payments infrastructure for software as a service companies and that funding round was led by the big global investment giant KKR. So a real signal of intent there from KKR as well. Away from that on the global stage. Japanese investment giant Softbank posted a record $26.2 billion loss and its flagship Vision Fund arm this week that was after a pretty torrid quarter against the kind of backdrop of geopolitical volatility and rising interest rates which have really battered the firm’s big tech holdings will specialist tech investor Softbank, so it’s a big shock for to Earth for the firm after it delivered record annual profits last year, and a bit of scepticism growing now over the boss Matteotti sons strategy of backing high growth tech stocks. back to London London FinTech dapoli, has announced its snapped up German open banking firm fin API. As its builds the muscles it holds city for a push into new global markets. That comes after a $51 million funding round last year. The apple is now set to earn the crown of largest open banking platform in Europe after the completion of that deal. And as I think a lot of people in the FinTech and tech sector will be aware crypto has created the price of Bitcoin Aetherium and other cryptocurrencies plummeted to 16 months lows this week in a major crash that has wiped out the gains made during the past years bull market. The past weeks in price of Bitcoin dropped by more than a fifth and the price of Aetherium dropped by more than a quarter. And investors are facing billions of dollars of losses. Host 3:00 Lots of news, it’s certainly been a rough week for tech, but it doesn’t stop there as Charlie will be discussing. Charlie Conchie 3:05 So that week, a very turbulent news in tech and fintech comes after what has been a pretty well, similarly turbulent quarter, I think against that sort of backup of soaring inflation, interest rate hikes, war in Ukraine, and you know, big listed tech firms have had a pretty torrid time of it. Some of the tech Titans that seemed invincible 12 months ago have been brought crashing down to earth, I think it’s fair to say and those growth focus firms that sort of promised returns some way down the track don’t suddenly seem so appealing to investors. So is that fall at Terminal One? Well with us tomorrow, that question over is Lauren Daniel, Technology Research Analyst at finncap. Good to have you with us, Lauren. Thank you very much i. So can you sort of zoom out and give us a bit of a big picture overview to start off and just take us through what this global tech rages and what really other causes of it. Lorne Daniel 3:58 To put it in context, we’ve seen a decline in all equity markets across the board, technology stocks, see or have clearly had a torrid time over the last six months or so. I think to put that in context, they had a very good run. Through the pandemic, when we saw a lot of what we call digital transformation, a lot of companies had to move their operations and a lot of a lot of transaction that had been done in the physical world moved online. So technology stocks had a very good pandemic, if you can put it that way. Simply because there was a drive to move things online away from the physical world. On the back of that we’ve now moved into a different era of post pandemic era, an era where we’re seeing interest rates, rising interest rates, and that’s coming on the back of a decade of low and low interest rate. Are environment where people could invest for growth. And you saw a lot of money piling into the, into technology stocks to grab market share. And we’ve now transitioned into this new post pandemic world, higher interest rates, where there’s more of a focus on return. What are these companies giving back, you can’t just invest for growth. So it’s not necessarily a turning away from technology, there will always be more technology, the future is about technology, it’s never going to be it’s never going to be a growth, not a growth sector. But there’s a focus on on what companies can return to investors now. It’s a different environment. And they, you will naturally see a refocusing on or re evaluation of stocks on the back of that. So we’re having a cut sort of correction, if you like, way. Charlie Conchie 6:14 Against this sort of, you know, soaring inflation and interest rate hikes, and this will be continuing for the foreseeable, what do you think? Lorne Daniel 6:21 I don’t, I don’t think it will last as long I think it’s a correction in the near term. And then we build again, from with a different perspective, rather than ongoing situation. There’s a lot of CEOs are now looking at, okay, we’ve had this era of being able to grab market share, okay, when what returns can we now to take from that and that will rebase investors views investors valuations. So if we look at sort of some of the firms that have had, you know, a bad few months, it’s not just kind of upstart tech founders it, you know, Microsoft is down 23% this year and had 190 billion wiped off in value after the Fed hike rates last week. They’re kind of, you know, generating billions of pounds of profits, in some cases, why are they being shunned as well? Is that is that sort of just saying, but if you look at the valuations, they’re not, they haven’t, they haven’t suddenly become cheap. They are still highly valued, they’re still around what 25 times. Microsoft at the moment, these are still very valuable businesses generating billions of profit across the big tech companies in the in the state. But there’s certainly been a revaluation of the multiples that investors will pay for them. And I think I mean, when you’re looking at Tech, in particular, so much of the value of a technology business is in the future. It’s not like a retailer or an industrial stock, you’re buying future revenue, you’re buying future growth. And if there’s a little bit of battle, a little bit less clarity in the future, then their valuations are impacted more. So. Certainly, we’ve seen a re… repositioning of valuations in the tech sector, and, you know, with big companies, that translates to billions of dollars being wiped off their market value. However, they they have billions more on their valuation. So although we’ve dropped from 30 times to 25 times what were still highly valued compared to a the industrial sector, which is, you know, you’re talking about 10 times if you’re lucky. So to put it in context, there is plenty of plenty of expectations still in those tech stocks. Yeah. Plenty of breathing space, they won’t be losing sleep over Yeah, Jeff Bezos isn’t down to his last buck. Charlie Conchie 9:03 I think you sort of touched on it in that first question as well. But I think some of the firms that have really borne the brunt of this have been those kind of locked down tech darlings, if you will. Netflix and peloton zoom partly I think you can chalk it up to governance issues as well but they have really borne the brunt of it? Lorne Daniel 9:19 Yeah, I mean it just for those particular stocks, you’re looking at some of the froth being taken off the top. I think during lockdown you were very people didn’t see an end to that lockdown. So those sorts of stocks the the Zooms if you like the peloton is the Netflix’s looked like they were going to take over the world this was going to be an ongoing thing as we come out of lockdown as the pandemic fades, then some of the excess is taken off their share price. And they weren’t the only stocks. You saw that in a lot of the over in the US, we saw a lot of the tele Doctor stocks fly and quite a few of them came to the market during that time. And something you couldn’t go and see a doctor. So online online medicine was was a hot, hot subject and we saw quite a few of those fly. As we’ve come out of lockdown as things are returning to normal, those stocks are getting a more realistic appraisal from investors. And to some extent that’s that’s that’s fairly natural, and you worry if it didn’t happen. Charlie Conchie 10:42 Yeah, they’re they’re fickle folk. Lorne Daniel 10:46 I think it’s important to appreciate what you’re buying, if you’re buying 30 years worth of earnings, you’ve got to know that that stock is is going to be generating earnings for 30 years and things can look all through a magnifying glass of lockdown at the time. Charlie Conchie 11:05 And if we sort of look at London specifically now as well, there’s obviously been this big shift to try and promote London as a tech capital are listed tech business in in London facing unique problems do you feel? Lorne Daniel 11:18 I wouldn’t say they’re unique problems, there are unique elements that can be for and against listing in London. Certainly London investors are more what you might call realistic, they won’t pay the premium, US investors will always see a glass half full. And US UK investors will see it half empty. Now there are rights and wrongs to that. Gives a lot more volatility to the US stocks. The expectation is of success, whereas a UK fund manager will will ask them okay, what can go wrong? We’re a long way from profit. Why won’t I get this profit? The US investor will ask When will I get this profit. So there is there is a natural dichotomy. That doesn’t mean that tech stocks shouldn’t be listening in London, they might have to prove their case more strongly. They might have to have a better business plan a better, more obvious milestones to that profit than you would in the US you can turn up in the US with a with a technology business plan and someone will fund you. But that that structure that that need to have a better business head on you as a technology entrepreneur is not a bad thing. And that can be quite the discipline of having investors who question you is arguably a better scenario to start with for publicly listed businesses than simply turning up and saying, Give me a load of money. I will grab a huge chunk of this market and we’ll figure out some way of making it profitable in the end. Yeah, it’s I think structure, the structure of having to justify yourself more or tightly is is not necessarily a bad thing. Charlie Conchie 13:23 Yeah, it seems to fall very much in line with the sort of national stereotypes of both nation doesn’t it the sort of cynic British investor and the very optimistic positive. Lorne Daniel 13:34 I had previously thought I wouldn’t constrain ourselves to just British we do see a lot of European investment in the UK technology sector. They don’t necessarily I’d always thought that our UK tech stocks would be generally too small to European invest funds. However, they have proven more agile and more quite attractive to European funds in the London market. Host 14:06 That was Lorne Daniel from finnCap. And that’s all we have for today. Thanks for listening, and see you next week.