Internet Stocks To Continue Their Uptrend
Internet-based stocks have been the talk of the town in 2020. Indeed, with the lockdown in various parts of the world, it was the internetbased stocks which reaped in the ‘moolah’ for its shareholders. After a decent performance in 2020 the dilemma faced by investors is whether these high-flying stocks of 2020 will move forward in 2021 as well or will they retreat? The DSIJ team discusses the outlook for the internet stocks in India
The IT and pharmaceutical stocks glorified the year 2020 and indeed the cyclical stocks and value stocks managed to make a comeback in the second part of 2020. What many investors may have missed is the performance of internet stocks on the Indian bourses. As a group, the internet stocks are a small group with low market capitalization and are nowhere near its peers in the IT sector. Hence, these set of stocks do not regularly hit the headlines and are not owned by the investing population. Most of the internet stocks are also complex in terms of their technology and products and often it is not easy to decipher the business models of these modern, hi-fi internet companies.
The old generation investors especially find it extremely difficult to ascertain value in the stock. Says Chetan Nayani, an old-time investor in the share market who has seen the dotcom bubble: “I have been active in the markets since 1987. I have seen many business cycles and I have seen businesses go bust and at the same time some businesses have grown manifold. I find it extremely easy to ascertain value in stocks like Gujarat Ambuja, Larsen and Toubro, Nestle, etc. It is easy to evaluate such stocks as the assets are tangible and forecasting the business cycle is relatively easy in such kind of stocks. The cash flow is also relatively easy to predict. The thing with most of the internet companies is I do not understand how they make money and where are the profits coming from.”
“I wasn’t too keen to invest in them but then these types of stocks keep making positive noise and their performance on the bourses is very encouraging. Therefore, I have decided to invest some additional efforts to understand these stocks and make some portfolio allocation to such internet companies. However, in my mind I am sure not to park more than 5 per cent of my total portfolio in such stocks simply because I find it difficult to understand these set of stocks,” he adds. Indeed, buying internet stocks is not everybody’s cup of tea. What are internet stocks anyways? Simply put, internet stocks or companies are organisations that offer its services exclusively on the internet.
InfoEdge, Matrimony, IndiaMart IndiaMesh, Affle India are some of the best examples of internet companies in India. Many argue that companies like IRCTC, ICICI Bank, HDFC Bank and even Voda Idea could be called internet stocks as they provide almost all of their services online. Even if these stocks may not be internet stocks, the underlining trend is that of increasing consumption of products of these companies online. The internet stocks or technology stocks came into the limelight once the global investors understood the underlying trend of increasing demand for the services offered by these stocks such as Amazon, Netflix, Facebook, etc. during the lockdown. Popularly known as the FAANG stocks, these stocks were investors’ and traders’ favourite picks in 2020. The table below highlights the valuations of the FAANG stocks.
TECHNICAL OUTLOOK on Internet Stocks
IT Index Like any other index, the Indian IT index too witnessed a steep fall during the start of the pandemic in February 2020 but the fall was short-lived. In the midst of March 2020, the Indian IT index gave a bullish reversal and since then has seen consistent appreciation with big impulses and small correctives. Recently, the index breached its prior all-time high at 25,317 exactly after 17 years. Yet, we hesitate to say that the top has been made since IT still has a long way to go considering the sector’s huge deal sizes and noteworthy cash reserves that have forced re-rating of IT stocks. Currently at the all-time high levels, the oscillators are trailing in the overbought zone but still facing northwards. Hence, any correction amid profit booking shall be considered as an opportunity for entering on dips.
Info Edge (India) : The company, alternatively known as Naukri.com, is an online and offline service provider through its online portals. The stock has witnessed gradual but straight recovery since the end of March 2020. Recently, the stock gave two spikes on the daily timeframe with huge volumes followed by a consolidation. The 14-period RSI has turned southwards which depicts slight correction. Once the stock breaches the 5,295 level it may see some correction up to 4,930-4,865 which can be considered as a buying opportunity. Otherwise the consolidation at the peak can be considered as a breather for yet another upside rally.
IndiaMart InterMesh: This is an online marketplace to assist manufacturers, suppliers and exporters to trade and has witnessed a trend of sharp upward movement followed by consolidation of nearly 10 weeks and again a sharp upward movement of five weeks. The oscillators are overbought but in no mood to give up yet. Hence, we may see consolidation to a slight downside in the stock in the upcoming session but the long-term view remains bullish.
Affle India : The mobile advertisement service provider has given two impulses and one corrective since April 2020 on the weekly timeframe and is recently seen consolidating for six weeks. The stock has kind of hit a double top with 14-period RSI negative divergence. Hence, in case the pattern is confirmed in the next week, the stock may see correction in the near term. Thereby, below 3,700 on weekly closing we hold 3,470 and 3,285 as the major supports.
Route : The messaging and voice API stock has been trading with higher tops and higher bottoms since its listing in September 2020. Recently, the stock witnessed consolidation and has failed to break out of its previous high. Hence, we hold 1,275 i.e. its all-time high as its resistance for now. The stock would turn bearish if it breaks its crucial support zone at 1,077-1,010.
Matrimony.com : An online matchmaking service provider, it has given a rounding bottom pattern breakout and a multiple resistance breakout at 755 levels followed by a pullback and a bounce back. However, the stock is witnessing profit booking since the last couple of sessions. But the overall pattern suggests an upside in the medium term and hence with some more correction the same should be considered as buying on a dip opportunity. When we compare the internet stocks that are listed in India, we find that the valuations are stretched and the RoEs are on the higher side. However, the growth for the internet stocks is also very high .
Conclusion
When it comes to technology stocks and internet stocks it is very important to understand the product offerings no matter how complex they are before buying the stock of any company. Internet and technology stocks may be difficult for many investors to analyse; however, if efforts are put in the right direction the vista of wealth-creating opportunities may open up for the investors in internet stocks. Internet stocks or technology stocks are considered potential multibaggers as technological leadership can place a successful internet company into a monopolistic situation. Facebook is just one of the examples of market share dominance using technology and internet.
The potential for internet stocks in India is huge as the market size in India is humongous and most of the market is untapped by such budding internet companies in India. There is a clear shift in trend in the way Indians are purchasing and consuming products. The listed internet stocks allow investors to tap the high growth investing opportunity when the popularity of internet and technology stocks is almost at all-time highs. The valuation is stretched across the markets and not necessarily for the internet stocks alone.
That said, each company in the internet space is unique with totally different business models. One has to really get into the details and attempt to predict the future cash flows to get conviction in the technology stock. A bottom-up approach and technical analysis can help investors identify the internet stocks that are in high demand. As of now, a ‘buy on dip’ approach while identifying opportunities in internet stock could be the best approach going into 2021. Allocation to technology stocks and internet stocks should be made keeping a longer timeframe in mind.