Tech-tonic shift

High-flying tech index set for slowdown

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Lightbulb moments. Source: Mauritius Images

Germany’s index of high-tech stocks, the TecDAX, is a bit of a technological marvel. It hits a new record high almost every week and has gained 31 percent in the past year, compared to only 1 percent for the DAX index of 30 blue chip stocks. Since its inception in 2003, it has grown 800 percent.

But counter to the idiom “if it ain’t broke, don’t fix it,” the index, which comprises 30 firms, is poised for a makeover this month. From September 24, it will include four heavyweight tech stocks which are also in the DAX index – software giant SAP, Deutsche Telekom, semiconductor producer Infineon, and Wirecard, the electronic payment company. It is due to be added to the DAX after playing a starring role in the TecDAX.

The move by stock market operator Deutsche Börse to “stabilize” the tech index is controversial because these giant firms will weigh down the nimble TecDAX. They are much more mature and, because of their size, will grow less quickly than the smaller firms currently in the index. The index weighting for each of the four firms will be capped at 10 percent, but as they make up 40 percent of the index, these firms will largely determine its ups and downs.

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Because of the impending change and the high valuations in the current TecDAX stocks, some analysts have a hold on the index. Current investors should not sell but new purchases should come only with buying opportunities when – if – the index turns down. Christian Kahler, chief investment strategist for DZ Bank, is one of those advising against new investments, even though he acknowledges that “the rally of tech stocks this year has accelerated worldwide.”

DAX all folks

But valuations are high. Price-earnings ratios on the 30 TecDAX stocks average 28, compared with just 13 for the DAX blue chips. Individual stocks are flying much higher. Biotechnology firm Evotec has gained 68 percent so far this year, pushing its PER to 97. Other strong performers like Nemetschek and Sartorius have PERs north of 60.

Such high valuations are normal for small, fast-growing companies, but it’s important to keep things in perspective. The 30 TecDAX firms are worth €160 billion and will earn some €4.4 billion this year – about half of what Volkswagen alone earned last year. The DAX companies are worth eight times as much at €1.25 trillion. Net profit of €95 billion is 20 times that of the TecDAX stocks.

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The strong performance of tech stocks in Germany follows the worldwide trend, as the dotcom bubble at the turn of the century fades into history. The five biggest companies in the world by market capitalization are all US tech firms – Amazon, Apple, Google holding company Alphabet, Microsoft and Facebook.

Wirecard has been the TecDAX poster child, as its price has already doubled this year. Over the past 10 years the stock has gained 3,000 percent — €5,000 invested then would now be €175,000. The fintech’s market cap has grown to €24 billion, twice as much as Germany’s second-largest bank, Commerzbank, and €4 billion more than Deutsche Bank, the country’s largest bank and erstwhile financial flagship.

Even at a sky-high PER of 64, Wirecard is a recommended buy at 18 banking houses, while only one has a sell on the stock. Hauck & Aufhäuser analyst Robin Brass feels Wirecard’s strong first-half numbers vindicate his view that its dynamic growth will continue. He has raised the price target to €225 from €180, compared to Tuesday’s close of €193.20 (it crossed the €180 threshold two weeks ago). HSBC has set the target even higher, at €235.

History has shown, in fact, that such high-flying trends can continue longer than expected, as the stock price races ahead of the actual growth in earnings. Wirecard was already very expensive a year ago by any reasonable measure. Since then it has gained 172 percent.

Ulf Sommer covers financial markets for Handelsblatt. Darrell Delamaide adapted this article into English. To contact the author: sommer@handelsblatt.com

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