Thinking about tech stocks tends to evoke images of major Wall Street drivers like Apple, Google and Facebook. But investors should not forget the promising — and profitable — German tech companies growing in the shadow of US giants.
Many of them are listed on the TecDAX, a stock index that tracks the performance of Germany’s 30 largest companies in the technology sector. And these tech stocks are currently in full swing. Since the start of 2017, the TecDAX has gained 37.5 percent, despite a small setback last week. The blue-chip DAX, whose record-breaking bull run has grabbed headlines in recent weeks, gained a comparatively paltry 14 percent this year. The tech stock index also outperforms the MDAX mid-cap index and the small-cap SDAX.
“A lot of German technology stocks are strong in a niche market,” said Thomas Angermann, a fund manager at UBS Asset Management. Despite the strong rise, investors tend to see room for improvement as many companies increase their investments for 2018. This is likely to translate into rising profits for capital goods in hardware and software branches. Mr. Angermann expects this will allow the stock market’s upswing to continue into next year.
Christian von Engelbrechten, portfolio manager at Fidelity International, said he does not mind the occasional high valuation, as long as “positive earnings prospects justify the increases in price.” His interest lies in companies that show strong profits and cash-flow development in the medium and long term.
Three German tech companies that saw particularly strong growth this year are the chip equipment manufacturer Aixtron, biotech firm Evotec and payment service provider Wirecard, which is arguably the most controversial value in the TecDAX index. Semiconductor manufacturer Siltronic also did fairly well.
Mr. von Engelbrechten is convinced that “Wirecard is active in the e-payment growth market,” despite having to defend itself against accusations that the company is in violation of Germany’s gambling laws. “Since competitors have either been acquired or are active offline, Wirecard is the only exclusive e-payment provider listed in Europe,” UBS fund manager Mr. Angermann added. “You cannot look past this stock if you are interested in this business.”
Aixtron is also active in an interesting market. The technology company, which manufactures equipment for the semiconductor industry, had a difficult year: Sales declined as the company invested heavily in research and development. However, Aixtron is now well positioned to benefit from the next product cycle, but “a sharp rise in the share price has been anticipated this year,” Mr. Angermann said.
The biotech sector, which includes companies such as Evotec, Medigene, Morphosys and Qiagen, should also be approached with caution. “Share price performance is heavily dependent on individual events. It is very difficult to assess whether certain drugs or substances will be approved or successful,” Mr. von Engelbrechten of Fidelity International said. But ever since Evotec has posted profits, Mr. Angermann sees a point of entry — an assessment not shared among all analysts. Igor Kim of Oddo BHF upgraded the share price from “hold” to “buy,” but considers the losses to be excessive. DZ Bank’s Heinz Müller predicts the shares worth will continue to fall and recommends selling.
RIB Software and Nemetschek, two providers of construction industry software, seem more promising, according to Mr. Angermann. “Nemetschek’s shares are already valued quite high, and the company is currently growing strongly,” he said. Both companies offer software solutions that help construction companies optimize the planning and building of large-scale projects. And with the European Union pushing for these so-called Building Information Modelling (BIM) solutions to be digitized by October 2018, the sector can expect a strong political boost: Contracts will only be given to construction companies that use appropriate software. The benefit of such this directive is that changes to plans can be shared with those directly involved, from the architect to the painter to the carpenter. “Demand for these IT solutions is likely to remain high over the next few years,” Mr. Angermann predicted.
TecDAX heavyweights tend to be well-received by fund managers. In terms of market capitalization, the largest companies in the TecDAX are found in the telecommunications industry: Telefónica Deutschland and United Internet, for example. The two companies, coupled with Wirecard and mobile communications company Drillisch, which was taken over by UI, are worth more on the stock exchange than the smallest DAX company Pro Sieben Sat 1, Mr. von Engelbrechten pointed out. Many investors underestimate that the company is not only strong in mobile communications and Internet sectors, but also in providing website-creating tools. “Medium-sized companies like to use these applications,” he added.
“German technology stocks are strong in a niche market.”
Analysts also expect synergy effects as a result of the Drillisch takeover. Ulrich Rathe of the analyst firm Jefferies sees opportunities for structural growth resulting from the merger. In Mr. Rathe’s recent study, this significantly increases the share’s price potential.
Mr. von Engelbrechten also finds IT service providers, like Bechtle or Cancom, interesting: “German medium-sized businesses in particular tend to trust local cloud solution providers because of their data security.”
Even though equity valuations are sometimes high, they show strong growth profits. The Bechtle share rose to a record high last week, according to an increased forecast for 2017.
Nordex, GFT Technologies, Adva Optical Networking, Medigene and Dialog Semiconductor are five companies whose shares have suffered losses this year. Nordex, the wind turbine manufacturer, is suffering from fierce competition in its industry. And since the US may be cutting subsidies for wind farms built after early November, the situation looks bleak for Nordex.
German tech stocks are not limited to the TecDAX. Companies like ticket marketer CTS Eventim and online fashion retailer Zalando are listed on the mid-cap MDAX while food delivery company Delivery Hero is on the SDAX.
Susanne Schier heads the investment team of Handelsblatt’s finance bureau in Frankfurt and focuses on auditing and information and communication technology. To reach the author: email@example.com.