Building a company with High Alpha means direct access to our extensive network. Tom Roderick—Co-Director of U.S. Equity Research at Stifel—joined our portfolio CEOs and finance leaders to discuss how tech valuations in 2024 could shape their budgeting and strategic planning efforts. Based in Chicago, Tom has been recognized multiple times by StarMine for his earnings estimate accuracy and stock-picking ability.
Let’s dive into the top takeaways.
Innovation May Be King But Interest Rates Are Almighty
To kick us off, Tom highlighted the significant influence interest rates can have on tech companies' valuations.
You can build fantastic businesses. You can grow, you can disrupt, you can take share. But at the end of the day, your company's value in the eyes of Wall Street has a lot to do with the multiple that Wall Street analysts are willing to apply to it.
Tom Roderick, Co-Director of U.S. Equity Research
When interest rates are low, companies tend to receive higher valuations. Conversely, as interest rates rise, valuations become more challenging to maintain. This dynamic means the Federal Reserve's actions and interest rate movements are paramount for tech companies and their fundraising strategies.
Houston: We Have a Problem…Or Do We?
Based on Stifel's research, a recession may not be lingering. Here’s why:
- Recessions require severe PMI Manufacturing contractions, and this seems unlikely in the near future.
- The history of the PMI Manufacturing bottoming leads experts to expect economic growth through Q4 2024.
- The resilience of the U.S. consumer has surprised many and some believe consumers will remain strong.
The supporting research has led them to predict a soft landing is still possible and could have positive implications for tech companies.
AI Is The Next Tech Super Cycle
One major highlight from the presentation was the resilience and potential of artificial intelligence (AI). Tom compared the current state of AI to the early 2000s, when he started covering tech stocks.
“This whole AI thing is very, very real. We’re in the early stages of the hype cycle right now, and then we'll go through the trough of despair for two years. Coming out the other end, we'll see the winners built on OpenAI.”
Tom Roderick, Co-Director of U.S. Equity Research
He pointed out that this feels like the beginning of a 20-year super cycle in the tech industry. He outlined how AI has the potential to revolutionize various industries and the explosive growth in demand for AI models, citing the example of Microsoft verbally committing to eight to ten billion dollars of incremental capital expenditures towards AI in 2024.
All Hail The Rule of 40
The market is shifting its focus to efficient growth and rewarding the companies following the "rule of 40," which implies early-stage companies with either low or negative profitability could still be reasonably priced at a high valuation multiple if their growth rate can offset their burn rate.
Tom emphasized it's critical for companies to balance growth with cost efficiency. Companies that can achieve strong growth and sustainable margins are receiving favorable attention.
Pay Attention To These Industries
Finally, Tom shared insights into the industries likely to experience growth in the coming years. Companies serving financial services, banks, insurance, transportation, materials, and real estate are expected to do well. These industries may be more inclined to invest in technology, making them future potential buyers.
Final Thoughts
While the current economic climate may present challenges, it is also an opportunity for tech companies to innovate and adapt to emerging trends. As you navigate this landscape, remember that being at the forefront of a 20-year super cycle is exciting, and with the right strategies, the future looks promising.