Behind The AI Threat Narrative(s)

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This story features CAR GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: CAR
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

Thoughts and observations behind the savage bear market that has gripped Quality and Growth stocks since mid last year.

By Rudi Filapek-Vandyck, Editor

Behind The AI Threat Narrative(s)

By Rudi Filapek-Vandyck, Editor

The persistent de-rating of global technology stocks is far from the only trend that has characterised the past eight months of ASX price action, see for example the spike in volatility in prices of gold, silver, bitcoin and uranium.

On Monday, as I am writing this week’s Weekly Insights, share prices are rallying from pricing levels that are well down from levels recorded mid last year.

I am not confident that what we are experiencing is a bottoming out in a nasty and prolonged bear market for businesses that previously could do little wrong.

I do note sector analysts and savvy investors are starting to push back against the market’s indiscriminate de-rating of companies linked to software, AI or technology broadly.

This might well prove the first embryonic step in countering what appear to be overly simplistic narratives that currently weigh on affected share prices.

The fact Car Group’s ((CAR)) half-yearly result simply met consensus forecasts and its share price rallied by double digits on the day is one extra source for optimism.

In contrast, the early beginnings of the local results season saw no net benefit for a market-beating financial performance by ResMed ((RMD)) and a swift harsh punishment for REA Group ((REA)) post a market update that ‘missed’ on a higher tax rate and slightly lower growth guidance for the second half.

Car Group management also reported steady progress on AI with several of its portals now enriched with conversational search.

More investing automatically translates into (some) margin pressure, but management seems confident it can control this dynamic without any nasty outcomes on the horizon.

It certainly drew praise in an early assessment from analysts at Citi, who see potential for the strong operational momentum to offset headwinds from a stronger AUD in the current financial year.

Despite the firm rally on Monday, Car Group shares are trading nearly -50% below FNArena’s consensus price target in a sign of just how savage the selling has been for this type of potential future AI victim.

Room For Optimism, But…

Market strategists at Macquarie continue to describe Car Group & Co as “falling knives”, suggesting any respite in the selling is likely to prove temporary at best, at this stage.

I agree with the implicit suggestion there doesn’t yet seem to be a circuit-breaker on the horizon, with sentiment worried about what could possibly go wrong at some point in the future if AI, indeed, turns out to be kryptonite for platforms such as REA Group’s and Car Group’s.

If current doom scenarios prove correct, investors have plenty of examples from the recent past to reflect on.

Take IDP Education ((IEL)), for example, whose market momentum got stunted, then destroyed by a global push back against immigration. Supported by covid-inspired momentum, those shares were trading near $40 in 2021.

Today, IDP Education shares are changing hands around $5.50, only having stabilised around that level (-86% below the peak) in the past six months or so.

The share market can truly punish hard when the tide turns for growth companies trading on elevated multiples. Every single rally along that trajectory was simply a brief pause en route to a price level once considered inconceivable.

As some of you might remember, IDP shares had previously been included in the FNArena/Vested Equities All-Weather Model Portfolio.

Apart from underestimating how severe its de-rating ultimately would become, and thus hanging on for too long, the Portfolio made two positive decisions:

-it did not average down or added more money to the flailing share price
-it ultimately sold and didn’t hold on until last year’s bottom

Back in 2023, the All-Weather Portfolio experienced a complete opposite scenario with ResMed ((RMD)) shares, which, at that time, ended up in a similar quagmire as are Car Group, REA, & Co today.

Back then the narrative was that GLP-1s would dramatically change the world and make respiration masks and treatments such as produced and marketed by ResMed obsolete.

By late 2024 those shares reached $40 from a bottom near $20 at the peak of GLP-1 selling.

I am by no means predicting this will be the exact course ahead for Car Group & Co, but I certainly see a lot of similarities as extremely simplistic disruption narratives are being applied across the board.

If I have to choose between these two opposing outcomes, I’d be inclined to think the future outcome for Car Group & Co will most likely resemble ResMed’s experience more than that of IDP Education.

But there’s no timing attached, and this process will simply have to run its course.

Are All Businesses Equal?

Without getting too much entangled in theoretical possibilities, and this versus that scenarios, I believe in many cases of the companies I feel familiar with, current narratives over-emphasise the importance of writing computer code becoming so much faster and easier, and under-appreciate the fact successful businesses offer security, compliance, governance, reliability, distribution, client bonding, prohibitive switching costs, and possibly even more.

Will some businesses be made obsolete through new developments? Most certainly.

But if anyone genuinely believes government departments will switch to internal coding simply because they can, they have no idea.

TechnologyOne ((TNE)) should thus remain relatively insulated, though that’s not what its share price is reflecting since the release of FY25 financials late last year.

I’d also nominate WiseTech Global ((WTC)), albeit founder Richard White remains both a force and a liability.

None of the companies de-rated are likely to report AI disruption in the present results season. Instead, Car Group and REA Group have been sharing insights about their progress on and implementation of AI.

Expect Goodman Group ((GMG)) and NextDC ((NXT)) to talk about strong demand continuing for data centres.

It is most certainly possible none of any of this matters in the short term, as narratives, sentiment and external market forces could hold the upper hand.

The current context has turned yesterday’s Growth Champions into today’s value propositions, but only if one believes the ResMed outcome is more likely than what happened to IDP Education.

Alas, no watertight guarantee can be provided.

Analysts Are Starting To Push Back

Multiple analyst teams have offered their five cents’ worth in recent days. Below is a short overview.

Ord Minnett has zoomed in on the smaller caps and believes the following business models look Highly Defensive in light of possible disruption:

• Energy One ((EOL))
• Gentrack Group ((GTK))
• Hansen Technologies ((HSN))
• TechnologyOne

The following business models look Defensive:

• Qoria ((QOR))
• ReadyTech Holdings ((RDY))
• Vista Group ((VGL))

Considered most at risk:

• Seek ((SEK))
• Car Group
• Airtasker ((ART))

Analysts at RBC Capital have highlighted the following for moats with better protection:

• Pro Medicus ((PME))
• TechnologyOne
• REA Group
• WiseTech Global

Citi analysts make the point that agentic coding tools could make it easier for adviser groups to build their own platform; but existing platforms –Hub24 ((HUB)), Netwealth Group ((NWL)), Praemium ((PPS))– are regulated products with significant compliance and trustee obligations.

In addition, recent remediation requirements arguably raise barriers to entry for self-build and new entrants.

Online classifieds portals are considered relatively less exposed compared to software given their strong market position as well as two-sided network dynamics. Car Group is Citi’s top pick in the space.

More AI means more compute means more demand for data centres. Citi continues to see a strong outlook for companies including NextDC ((NXT)) and Megaport ((MP1)).

Online travel agencies could be ripe for disruption, which would affect SiteMinder ((SDR)) but Citi counters cheaper-priced channel managers have not impacted Siteminder’s growth materially to date.

Jarden has nominated WiseTech Global ((WTC)) as possibly offering the most protection against AI disruption, but overall argues all Australian companies under coverage have protections and appear to be pro-actively investing in AI capabilities.

Top Picks are Seek ((SEK)) and Xero ((XRO)). Car Group, TechnologyOne and WiseTech Global are Overweight rated. REA Group has a Neutral rating.

Jarden also believes insurance brokers, Steadfast Group ((SDF)) and AUB Brokers ((AUD)), could suffer greatly from AI disruption, but any risks in the short to medium term appear manageable and that makes present share prices “cheap”.

Barrenjoey specifically makes the point management at REA Group sees AI as an opportunity to accelerate product development, both on the front end and the back end of its platforms. Apparently less than 1% of traffic is AI related, and has declined recently.

Chatbots might be facing an uphill batlle if they want to replace REA’s offering, with the company building digital twins (virtual replicas of properties) as it accumulates more and more proprietary data.

On the demand side, the company has access to unique consumer behavioural data within a scale that is difficult to replicate.

This debate is far from concluded. February won’t be able to answer all questions.

To be continued.

FNArena’s Corporate Results Monitor: https://fnarena.com/index.php/reporting_season/

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