UPDATE: Impact of COVID-19 on valuation levels in the global technology, software and IT services sector
Executive summary of the report:
Since our last update in April, valuation levels in the technology sector have largely reached pre-crisis level again. Our view that technology companies, in particular software companies, have preserved value during COVID-19, has been confirmed. While valuation levels of horizontal software providers have reached pre-crisis levels, vertical software providers are currently trading even higher (+12%). Also, the hardware technology sector appears to hold up well, trading
evenly (+0%) while IT services providers are trading slightly below pre-crisis levels (-8%).
By now, most companies in our peer group have commented on their full year outlook. The picture is mixed, as approx. half of our peer group did not see a need to adjust their outlook, the other half did or even fully suspended their outlook (26%). Differences can be clearly observed between the peer groups and their resilience in this crisis.
While we had expected a further set-back of stock market valuations per our valuation update in April (in particular in comparison with the Global Financial Crisis 2007-2009), government support measures drove stock markets to new highs, and all indices in our analysis are trading well-above pre-crisis levels.
Longer term, liquidity is expected to flow even more strongly into stable, crisis-proof assets, such as mission-critical software companies with a high degree of recurring revenues and strong margins. Given the scarcity of such assets, we may even see increasing valuation multiples for high-quality assets – nevertheless, we continue to see attractive investment opportunities within the sector.
M&A markets paused in April and May. Since June, we see a soft re-opening of the M&A markets and expect deal-flow to pick up significantly after the summer break. As we expect a selection bias, we in particular expect high quality assets to be brought to market. Given the strong sentiment of public markets and the continued high levels of liquidity in the markets, we expect transaction multiples to – at least – remain stable.