UK Edition
Questor: after a 42pc gain on ZPG, will this be our next technology winner?
The UK technology sector is on a roll. Last year $7.9bn (£6bn) of venture capital investment was poured into British start-ups – more than Germany, France and Sweden combined.
Because that money won’t be realised for up to a decade, it should be regarded as a vote of confidence in the country as a hi-tech hub today and in its ability to continue thriving after Brexit.
Something similar is happening among larger tech stocks. There is the usual exuberance that comes from a series of successful listings. Spotify, the music streaming service, started life strongly on Wall Street, and more recently Adyen, a Dutch payments company, soared.
However, an emerging trend worth following is those tech stocks heading back into private hands after several years on the public market.
While it is bittersweet to see high-growth companies disappear from retail investors’ grasp, this column was gratified to see our “buy” recommendation for ZPG in January rewarded with a takeover in May at a 42pc premium to the price at which we tipped it.
Alex Chesterman, ZPG’s founder, had used the group’s quoted shares as currency to assemble a stable of websites including Zoopla, PrimeLocation, Hometrack, uSwitch and money.co.uk, but concluded that to push it on to bigger things the business was better off in the hands of private equity group Silver Lake.
- Questor archive: telegraph.co.uk/questor
The prevailing view is that markets apparently transformed by technology – think of buying a car, home or energy – ain’t seen nothing yet. And in the race to build the number one platform for each segment, big investment funds have a lot of dry powder.
This brings us to Moneysupermarket.com, the price comparison website. Founded in 1993 as a mortgage listings company, it has broadened out to cover household, car and travel insurance, credit cards, loans, energy and broadband provision. It has used increasingly odd advertising campaigns – think twerking businessmen and dirty dancing He-Man – to keep minds focused on the mundane task of shaving a few pounds off your gas bill.
The shares have had a fantastic run, rising fivefold under the previous chief executive, Peter Plumb, and making a rich man of co-founder Simon Nixon, who sold his final holding two years ago. The road ahead looks harder under Plumb’s successor, Mark Lewis, who in February warned that earnings would be flat this year as he invests more to make Moneysupermarket’s searches quicker and simpler.
Some of Questor's other tech stock tips
- Questor: buy Google – it’s way ahead of its rivals and is spending the money to stay there
- Questor: forget Spotify, this is the tech stock to buy
- Questor: Buy Boohoo – after a shaky few months the fast fashion group is back on trend
- Questor: an unforeseen threat forces us to sell Electronic Arts – put the money in Adobe instead
That move will be welcomed by the Competition and Markets Authority, under the new leadership of bankers’ scourge Lord Tyrie, which gave the industry a vote of confidence last September following a year-long investigation – just as long as websites are transparent about how they make their money.
In its last trading update Moneysupermarket confirmed that its growth rates continued to lag the market, which includes rivals Gocompare and Comparethemarket. The top line was 4pc higher in the first quarter, with insurance the star, utilities rising strongly against undemanding comparisons last time and money weak because financial services providers had cut promotions.
Analysts at Royal Bank of Canada credit the firm with strong market positions in all areas of price comparison but remain nervous until there is greater clarity on the 2019 earnings outlook. Some of the fog may lift on July 19 when interim figures are due. Canaccord Genuity, the broker, forecasts year-end net cash of £32m and flag the possibility of share buy-backs resuming as a short-term fillip.
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
In the meantime, the shares have clawed back most of their losses in the aftermath of the profits warning. They trade on 17 times next year’s forecast earnings, which is not regarded as expensive for an internet stock, and cheaper than the valuation at which Questor tipped ZPG.
It is never wise to buy on hopes of a takeover alone. Yet Moneysupermarket feels like a business in need of a reboot that could be better served going private so that management can redouble its efforts. In the meantime, there is some upside regardless of the execution risk. On balance, buy.
Questor says: buy
Ticker: MONY
Share price at close: 314.9p