Long Read  

Which tech stocks hold promise?

A valuations reset provides an opportunity for VC and PE funds to back companies at more realistic prices than the boom period of the past two years, with the potential of healthy gains in the long run.

The good news is that despite the market storms, VC and PE firms are awash with dry powder reserves, which have been raised for only one purpose – to fund growth of promising private tech companies.

Compared to the early-2000s, corporate technology customers are much more aware that digital technologies provide an added layer of protection during an economic slowdown and improve productivity.

Well over $2tn (£1.6tn) sits in the coffers of PE and VC funds worldwide, more than double what was available in 2003. This ‘wall of money’ is unprecedented in the entire history of the tech industry since its inception and should help it weather any downturn.

Recession-proof sectors

We also know there are likely to be several significant sectors that will remain resilient during an economic downturn. For instance, as the pandemic surged and businesses moved to working from home, software-as-a-service (SAAS) companies boomed.

These firms remained agile during the pandemic, experimenting with new tools and approaches, highlighting their ability to adapt to market conditions. Predictable revenues from monthly or annual subscription fees also make SAAS an investor haven, and enable them increasingly to tap new financing sources such as debt when required.

Green industries, including energy optimisation, offshore wind and electric vehicles (EVs), remain extremely attractive during a downturn as energy efficiency delivers real cost savings and resilience in the face of rising power costs.

The macro shift towards sustainability also means a whole range of green sectors are expected to flourish post-recession.

Finally, there are numerous economic sectors where tech penetration remains in its infancy, such as in logistics, e-commerce and supply chains, which retain enormous growth potential irrespective of recession risks, and in many cases can be accelerated by cost concerns that drive even stronger interest in tools that can reduce operating costs.

The future’s bright

While the immediate future inevitably looks less bright for the tech sector, it is by no means doom and gloom. Inevitably, any market takes some time to settle after a shock. But we are already seeing a shift that will become more pronounced for the balance of 2022 and beyond.

Larger financings and mergers and acquisitions will inevitably increase, both in parallel, as financings will tier towards safer bets – either larger private companies, which will likely get even more investor attention, or mid-size private companies that are already positioning for leadership in a space or geography.