Why are shares of Russian IT companies attractive?

Since the beginning of 2024, shares of high-tech companies have once again become a popular destination for global investment. This led to strong growth in American indices. Positive dynamics are also demonstrated by companies in the Russian IT sector, whose performance is growing against the backdrop of the replacement of offers from foreign players and unprecedented government support for the sector. Including such securities in a portfolio increases its diversification and can improve results. However, it is worth taking into account the risks of such investments, including those associated with increased competition, a shortage of IT personnel and rapid growth in personnel costs.

Playing ahead

Bank of America’s (BofA) February survey of portfolio managers shows growing demand among global investors for technology and telecom stocks. The study is quite representative, since it involved 249 managers managing assets worth $656 billion. According to the study, the number of managers whose share of investments in shares of such companies was above the indicative level was 36% higher than the number of those who was lower. Over the month, the indicator increased by 11 percentage points and reached its maximum value since 2020.

According to BofA, two-thirds of respondents named the most popular trading idea in February the purchase of shares of the Big Seven (MAG7) companies – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta (the activities of the latter are recognized as extremist in the Russian Federation and are prohibited). However, not all securities on the list were equally in demand by investors. The best performance since the beginning of this year has been shown by Nvidia shares, which have risen in price by 62%. As a result, the company’s capitalization amounted to almost $1.8 trillion, and according to this indicator in the American market it came into third place, displacing Alphabet (an increase of 2%). The shares of Meta (37%) and Amazon (19%), recognized in the Russian Federation as extremist and banned, showed strong growth. At the same time, the remaining MAG7 participants even lost 2–20% in capitalization.

The return of interest in shares of technology companies is primarily due to the steady growth of their financial performance.

Total fourth-quarter 2023 earnings for the 369 S&P 500 index members that have already reported results rose 5.8% year-over-year, while revenue rose 3.6%. “If not for the strong performance of the technology sector, the average earnings of S&P 500 companies would have declined by 0.1%. Moreover, without taking into account the largest companies in the MAG7 group by capitalization, the average profit of the companies included in the index would have decreased by 2.9%,” notes Oleg Novikov, investment director at Astero Falcon. He also notes the high efficiency and financial flexibility of technology companies’ business models, which is reflected in faster profit growth rates than revenue growth.

In the role of catching up

Despite the isolation of the Russian economy, domestic IT companies are moving in the global trend. According to the Moscow Exchange, since the beginning of the year, industry indices have grown confidently – “Information Technologies” (22%) and “Telecommunications” (15%), significantly ahead of the MOEX index (less than 5%). In general, the Russian technology sector has become one of the few clear beneficiaries of the geopolitical and sanctions situation that has developed over the past two years. During this time, many foreign IT vendors left Russia, leaving Russian companies without technical support and new technological solutions.

Large-scale import substitution and unprecedented government support played a decisive role in this, experts point out. The main driver of growth in the Russian technology, media and telecommunications sector “is the entry of companies into new segments and the growth of e-commerce penetration in Russia,” adds Anton Tarasov, senior analyst at Pervaya Management Company. Mikhail Nesterov, head of the analytical department of TKB Investment Partners, also notes “strengthening requirements for information security and secure IT solutions and the ongoing digital transformation in all sectors of the economy.”

“Oldies” and “newbies”

However, unlike the American IT sector, the Russian segment is poorly represented on the stock market and so far has little influence on the movement of indices. When calculating the MOEX index, the dynamics of stock prices of four companies from the Information Technologies index (Yandex, Ozon, VK, Positive Group) and two companies from the Telecommunications index (MTS, Rostelecom) are taken into account. In total, their weight is only slightly more than 6%.

However, recently the information technology sector has been expanding through IPOs. So, in October last year, the initial placement spent “Astra Group”, in early February of this year ended placement of Diasoft shares. Both placements were in demand by private investors, which led to the order book being oversubscribed tenfold. During the IPO of the Astra Group, the number of transactions exceeded 118 thousand, in the case of the placement of Diasoft – more than 142 thousand. In the first days of secondary trading, the shares of both companies increased in price by tens of percent.

Don’t forget the flagships of the Russian IT segment – Yandex and Ozon. At the end of the fourth quarter of 2023, Yandex’s revenue increased one and a half times compared to the same period in 2022 and amounted to 250 billion rubles. “Due to the departure of foreign companies, the business growth rates of Russian representatives of the IT sector are higher than expected. If the fairly large Yandex increased its revenue by more than 50%, then smaller representatives of the industry sometimes show more than double growth, as in the case of Astra,” notes Finam FG analyst Anna Buylakova.

Anton Tarasov points out that Ozon, against the backdrop of strong growth, is also demonstrating an improvement in operational efficiency. “At the moment, investors’ attention is focused not only on the growth of the company’s core business, but also on the growth of individual segments, such as Advertising and Fintech, which can provide significant support to the company’s consolidated profitability in the future,” notes Mr. Tarasov.

Risks of rapid growth

Market participants do not exclude a further increase in the number of technology companies. According to Finam analyst Leonid Delitsyn, companies that are ready to list shares on the stock market operate in the segments of operating systems, database management systems, virtualization systems, cloud services and information security services.

Adding technology stocks, market participants believe, increases portfolio diversification. However, it is worth considering the specific risks inherent in this sector.

Mikhail Nesterov includes the risks of the return of international participants, reduction of state support, increased competition, shortage of IT personnel and rapid growth in personnel costs. “When investing in innovative and fast-growing segments, it is worth considering that, due to their “newness,” the operating environment of such enterprises can change very quickly. That is, the sales market may not be fully studied, and regulatory innovations can significantly affect operational processes and financial performance,” notes Anna Buylakova.

Vitaly Gaidaev