It is easy to miss things right now in the world of tech investing.
After all, it feels like we have had 10 years’ worth of excitement and upheaval in the space in one and a half.
The year to date is no exception and it can tell us a lot about the future.
By and large, tech stocks have had good earnings seasons this year; a result of our lives being increasingly led via our home wifi connections.
However, they have also had two sharp corrections recently, one in March and one in May.
These were seemingly driven by a combination of inflationary fears, managers positioning their portfolio for the desperately awaited post-Covid recovery, and possibly also profit-taking ahead of US President Joe Biden’s proposed reforms to capital gains tax.
We have also been hearing a lot about semiconductors – specifically that they are terrifically important and there is a shortage of them, but most of us remain unclear on what that actually means or why they are so important.
Then, to top it off, you have everyone’s favourite tech mogul flirting with abandoning fiat currency before swiftly re-embracing at least part of it; resulting in the bitcoin bubble deflating, for a short time at least.
So, you would be forgiven for missing a more subtle signal that provides an indication of tech investing post-Covid: the market is learning to distinguish between exciting, but profitless, ‘disrupters’ and profitable tech-based ‘enablers’.
Over the past six weeks, these ‘disrupters’ – typically fashionable, high-growth companies that have or claim to have proprietary tech – have fallen 30 per cent.
Whereas the ‘enablers’ – the companies selling the pickaxes in the gold rush – are holding steady or making modest gains over the same period.
This divergence can be seen in the chart below, comparing the performance of two investment funds focusing on very different types of company. The ARK Innovation Active ETF is focused on disruptive businesses, often small and loss-making, but growing very fast and with astronomic valuations.
In contrast, the BlueBox Global Technology Fund largely ignores disrupters, and instead concentrates on very profitable enablers, where those profits are consistently outgrowing the market.
Both funds had extremely good performance in 2020 (ARK’s was truly spectacular), but while BlueBox’s enablers have held their own since mid-February, ARK’s disrupters appear now to be trending back downwards fast.
This performance comparison puts the issue into sharp focus, but there were signs this was on the horizon.
Investors are, and have been, growing increasingly sceptical of companies that have changed the way we live our lives, but are yet to generate a profit.
The most pronounced recent example of this was Deliveroo and its damp squib of an IPO.
Ahead of its listing, the food delivery company and its cadre of advisers were adamant that the ‘tech company’ warranted its prestigious multiple and that it was steal at a valuation of £7.5bn.