EVP Speaker Series #2: Richard Tse, A Public Market Perspective on Tech
On July 7, members from the Extreme team and a few other key individuals gathered around boxes of Quesada burritos in the EVP boardroom for the second event in the EVP Speaker Series. This week, we welcomed Richard Tse, Technology Analyst from Cormark Securities to come in and speak to us about “public market perspectives on tech”. Ray Sharma from Extreme Venture Partners was excited to introduce him to the crew, highlighting Richard’s success as the top ranked tech analyst in Canada — he really knows what he’s talking about!
A little bit about Richard and Cormark Securities:
Richard Tse is a Technology Analyst with Cormark Securities. Having worked in the technology sector for over 15 years, his experience gives him a wide range of perspectives from operations to valuation. Richard is ranked a “Top Gun” analyst according to Brendan Wood International and has won numerous awards for stock picking according to StarMine | Thomson Reuters. His research has been referenced in publications such as the Globe and Mail, The Wall Street Journal, and (surprisingly) Vanity Fair. In addition, Richard is personally involved with the VC community as a venture / angel stage investor and advisor to early-stage start ups. Having began his technology career at Nortel Networks, he moved into Technology Equity Research with Merrill Lynch’s Global Technology Team. As a result, Richard provides a global perspective as it relates to his coverage list of companies that range from micro to large cap technology names.
Cormark Securities Inc. is a leading independent investment dealer and industry leader recognized for its knowledge and commitment to emerging growth markets like Technology. Cormark has been rated Canada’s #1 small/mid cap brokerage firm by institutional investors for five of the last seven years, as compiled by Brendan Wood International.
Here’s a short recap on a few things that Richard shared with the group during his presentation.
What do Institutional Equity Research Analysts do? They are the stock pickers of an investment bank. As specialists in their respective sectors, they conduct due diligence on the industries they cover and the respective companies within them. That research is then used by internal and external resources to help make investment decisions.
Contrasts between the US and Canada in regards to tech: According to Richard, Canadian investors have historically spent less time focusing on tech compared to American investors. In Canada, only ~2.5% of the S&P/TSX is represented by tech while in the US, tech represents ~22.1% of the S&P. That said, when looking from 2013 to present day, Canadian tech has outperformed US tech. Richard left us with an interesting question up in the air: “Perhaps we should be spending more time on tech in Canada?”
Case Study: During the presentation, Richard gave some examples of recent public offerings that have worked and have not worked. The examples demonstrated both the risks and opportunities involved in public investing, and showed us that growth and consistent execution are generally the key drivers of winners in this industry.
What drives tech stocks? Richard points out that there are many variables that drives stocks, but a lot of it depends on the “state of the market”. In other words, recognizing the psyche of the market can be very helpful. According to Richard, there are three states of the market: Momentum, Relative Value, and Fundamental Value. Momentum is a state that is common in a “bull market”, a market in which share prices are rising. This state is often the best time to raise money. In the Relative Value state, investors become more pragmatic when making investment decisions. In the Fundamental Value state, common to a “bear market”, the market is in decline, and share prices are dropping steadily. Within this state, investors tend to zone-in on a company’s intrinsic value. Overall, Richard highlights recognizing the importance of what state the market is in and acting accordingly.
What are the three broad types of growth investors? Richard says there are many types of investors. He touched on three types “growth” investors who are common to tech and who focus on outsized or accelerating growth, “value” investors, those who focus on price to earnings and valuation, and “event-driven” investors, those who are focused on catalysts like a restructuring or regulatory change in the environment.
What drives earnings and valuations? Product cycles. Richard says that you have to have a commercial model tied to the product cycle, and a clear way of how you are going to monetize that product. “Product cycles give investors something to rally behind”. One company Richard used to explain the importance of the product cycle is OpenText Corp, a reputable Canadian Enterprise Information Management company. Richard explains, once OpenText rolls out a new product, they start to develop a new platform shortly after. He says that if you have an established product for a while, with a strong customer base, you need something new to reinvigorate investors and clients to come back. He emphasizes this, and adds that “you have to do this, and tell people about it.” An example of a company that did not execute well on the refresh is BlackBerry, as they waited too long to adapt to the changing smartphone landscape.
Richard also highlights that forming relationships (including the investment community) is important as companies develop and mature, given their need for growth capital. Firms like Cormark Securities have expertise accessing such growth capital. He says that while some deals can be done in hours, some can also take months to form and complete, which is why it is critical to select an experienced and trusted partner. Be prepared to answer tough questions about your company, your products and your competition, while showing that you have a scalable business model. He says that in the heyday, those one-hour meetings were what closed deals, but now investors spend more time doing their research. However, for the right name in the right market, there is still a FOMO (fear-of-missing-out) factor. Timing is everything.
What’s the secret to successfully investing in tech? Richard says he looks at three things:
- Have a product cycle, be constantly innovating.
- Have outside growth from that product cycle (approximately 20%).
- Expand your margins. When all three work, you’re pretty much set.
When one of these three components “breaks”, you will have a problem. Richard left us with one last thought. While high growth seems to be the leading requirement for investing in tech, he reminds us that “profitability still matters”. When companies mature, all eyes turn to this metric so you better show you have it, and how you plan on growing it.
We really enjoyed learning more about tech in the public market sector. Thank you, Richard, for taking time out of your day to enlighten us! Stay tuned for the third speaker event of the EVP series, coming mid-July.
