Enterprise Software Monthly Report | January

21 January 2022

 

Enterprise Software ETF Monthly Report: Key Takeaways

High growth and momentum names continue to be an area that investors are using as a source of funds as broad-based multiple compression continues. Driving the narrative is upward pressure on real interest rates, with the market pricing in three rate hikes over the course of 2022. After outperforming the S&P 500 by 27% in 2020, the NASDAQ lagged the S&P by 5% in 2021. This marks only the second time in the last ten years that the S&P 500 outpaced the tech-heavy NASDAQ. Despite numerous supply-chain issues, the “real economy” index reigned supreme in 2021. [1]

The end of November of this year was awfully reminiscent of Q4/18 where we saw rapid multiple contraction that seemed to continue through to the end of the year. [2] The driving factor this time again was the anticipation of an increase in rates that would lead to multiple compression. This period was just as violent as before, which can be described as a “spec tech wreck.”

Every talking head jumped onto CNBC to pull up a chart on the drawdown from all-time highs in growth and momentum names. From ATHs: ROKU down 57%, PINS down 60%, Square down 44%, etc, etc…  The headlines were sensational, but also failed to zoom out on the meteoric rise of each company over the past two years alone. From pre-pandemic high to recent lows: ROKU up 50%, PINS up 44%, Square up 85%. Adjusting that time period from pandemic lows to recent lows: Roku up 219%, PINS up 220%, Square up 295%. [3]  My point here is that time periods can be awfully selective when looking at these momentum-based companies. It’s important to zoom out when everyone heads for the door.

In our view, it is also important to remember that over the short term the stock market is a voting machine, but in the long term it’s a weighing machine. COVID has been the single largest black-swan event since software companies have existed. [4] Sure we had the tech bubble back in the 2000s, but you could count on one hand the number of actual software companies. Now there are all types of flavours, with over 100 on our tracking model which lends itself to a lot of M&A opportunity. 

 

Macro Outlook

When we look at the high-growth companies that have contracted, we go back to our fundamental thesis and analysis which has largely unchanged. Can multiples compress a bit further? Absolutely. But these companies are best in class in the most rapidly growing industries. Growth tech did get ahead of itself, and these periods of digestion are needed. Nearly everything switched online over the last year, as many digital transformation trends were accelerated drastically. Now is the time to get in. With such a rapid overdone sell-off, we believe we are nearing the levelling-off of multiple contraction. At the end of the day, these software companies sell solutions with very sticky recurring revenue, high switching costs, and high gross margins. Software companies typically have little to no debt, and with free cash flow generation, in periods of sell-offs like these, typically go back to market to repurchase shares. 

Now is the time to get in. With such a rapid overdone sell-off, we believe we are nearing the levelling-off of multiple contraction. At the end of the day, these software companies sell solutions with very sticky recurring revenue, high switching costs, and high gross margins. Software companies typically have little to no debt, and with free cash flow generation, in periods of sell-offs like these, typically go back to market to repurchase shares. 

 

Enterprise Software ETF Performance

As of 31.12.2021


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

-6.83%

-7.19%

NA

-7.00%

NA

-7.00%

Solactive Purpose Enterprise Software ESG Screened Index NTR

-6.78%

-7.06%

-3.13%

-6.75%

4.21%

-6.75%

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Bloomberg / HANetf. Data as of 31/12/2021. Please note that all performance figures show net data.

 

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