Israeli Hi-Tech Feels the Pain of 2022, Which Companies Can Weather the Storm?

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Chandrima Sanyal, partnered with TipRanks
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Israeli Hi-Tech Feels the Pain of 2022, Which Companies Can Weather the Storm?Credit: shutterstock
Chandrima Sanyal, partnered with TipRanks
Promoted Content

The Israeli economy has displayed immense resilience since the start of the Covid-19 pandemic. In 2020, it was among the worst hit, with its GDP contracting almost 29% in the second quarter of the year. But it bounced back on a burgeoning tech industry.

In 2021, the Israeli tech sector saw 27 IPOs on the U.S. stock exchanges including SPAC-based listings, and 75 IPOs in total, according to a PwC report. A rise in merger and acquisition activities, especially as Israeli companies scooped up fellow Israeli firms, not only spoke of the solid financial recovery of the tech scene but also underscored the fact that the innovation ecosystem is maturing and graduating to scale up from start-up.

Nonetheless, so far into 2022, 22 of the IPOs and SPAC listings debuting last year have fallen back to their IPO values or even below. The worst performing of these debutants is auto-tech company Otonomo (OTMO), which has dropped 86% below its initial valuation.

Using TipRanks, another Israel-based start-up, we wanted to see how Israeli companies are performing in the current market circumstances.

Refusing to Get Beaten Down in 2022

The year so far has been marred with challenges. First, the Russia-Ukraine war has led to inflation across the world. Consumer prices in Israel hit a record high of 4% in April. Then came the beginning of a series of interest rate hikes by the U.S. Federal Reserve, leading to general pessimism among investors globally.

Moreover, the recent bout of coronavirus in China has further disrupted the already precarious microchip supply chain situation that has been plaguing the tech sector. Not to mention the supply constraints coming from Ukraine, a leading supplier of neon, an essential component of chip production.

Despite looking strong and unfazed, a broader look at current trends shows that the external headwinds have, in fact, seeped into investor sentiment in Israel. The TA-125 has declined 3.27% so far this year, and the TA-35 has shed 2.97%.

However, Israel’s strong standing in the hi-tech field is having a powerful hand in providing a buffer against the challenges that 2022 is bringing. The nation is a powerhouse of technological innovations and the global industrial sector is well aware of it.

In fact, the American Bill passed in March this year has explicitly included Israel in its plans to expand technological partnerships with various like-minded nations.

The Israeli tech scene is not letting the noise slow it down. The government’s push for more emphasis on quantum computing in microchips, and the tech sector’s relentless efforts in expanding its capabilities in digital health, food technology, and supply chain logistics innovations are helping the nation cope with the recent concerns better than most others.

This explains why many of the tech companies born in Israel are being favored as good bets even during tumultuous times such as these. With the help of TipRanks’ alternative data such as Wall Street analyst consensus ratings and price targets and insider activity, we examined two Israeli companies trading on the U.S. stock exchanges, including their fundamental pros and cons, and prospects.

ironSource (NYSE: IS)

ironSource provides a unique business platform that equips app developers with a comprehensive set of software solutions that help them scale their apps into full-fledged businesses. The company got listed on the NYSE via a SPAC deal with private equity firm Thoma Bravo in June last year, with an initial valuation of $11.1 billion. However, so far, the valuation of the firm has lost considerable valuation and is currently around $2.82 billion.

Moreover, the company also recently slashed its outlook FY22 to $750-$780 million from the previous outlook of $790-$820 million. The analyst consensus estimate stands at $810.88 million. Also, weak Q2 guidance further spurred caution among investors.

However, what counts is its journey upwards and onward. Despite the challenges and red flags, the company seems well poised to grow in the longer term. Looking at the consensus opinion of Wall Street analysts is also encouraging. Despite a price target slash for ironSource by most analysts covering this stock, the consensus remains bullish on the long-term prospects and their average price target indicates close to 150% upside potential in the next 12 months.

For instance, Deutsche Bank analyst Bhavin Shah trimmed the price target on ironSource to $6 from $9 bearing near-term concerns in the gaming market and other macroeconomic challenges. However, he kept a Buy rating on the shares looking at strong upsides for longer duration investors.

Again, it seems like all the downsides to the near-term prospects have already been factored into the current share price level. William Blair analyst Dylan Becker was impressed with the proactive step from ironSource to cut the full-year outlook despite any apparent impact on its business currently. Becker believes that the long run is quite advantageous for ironSource in the area of contextual modeling.

“We believe this is a prudent approach given the broader macroeconomic uncertainty, and one that will likely prove conservative over time given the continued elevated levels of engagement and emphasis on content discovery afforded by digital app platforms like ironSource that can help developers capitalize on the broader shift in ad budgets to more mobile and specialized formats,” he noted.

Coming to the fundamentals, it is important to mention one important technical concern. The company’s return on equity (ROE), which measures a company’s profit-making capacity, has deteriorated to 4.9% as of March 31, from 5.4% recorded on December 31, 2021. This means that for every dollar of shareholder equity, ironSource generated a little less than $0.05 in profit.

While this is not a very impressive ROE, it is important to note that the company has managed to achieve this profitability without any net debt. A technology company free of net debt is quite impressive from investors’ point of view. This gives us hope that with a strong balance sheet, ironSource can seamlessly invest in solid and sustainable growth-driving initiatives even if it takes time to show results.

SentinelOne (NYSE: S)

Cybersecurity company SentinelOne forayed into the NYSE in June last year in the highest valued cybersecurity IPO in history. Its unique AI-powered Singularity platform relies on AI rather than human analysts, making it more efficient than other traditional cybersecurity services.

Worst things first, the company is among the victims of circumstances this year, down to $6 billion in market capitalization from its debut valuation of $9 billion.

Moreover, insider trading activities are also not very encouraging lately, with one Buy transaction and five Sell transactions in May. Insiders are privy to confidential company information and know much more about the company’s fundamentals than others. Thus, it makes sense to consider insider trading activities before making investment decisions.

Now coming to the upsides, the devaluation was nothing but a result of initial overvaluation rather than fundamental deterioration. The forward twelve-month price-to-sales ratio was a whopping 55 initially, which has now dropped to around 18, making it more within reach of investors.

SentinelOne has also managed to grow its revenues by 120% year-over-year to $204.8 million in fiscal 2022, and it projects growth between 79% and 81% this fiscal year ending January 2023. The company is also benefiting from a growing customer base and improved customer retention, along with consistently expanding adjusted gross margin.

Despite still running in loss, the company has a lot of room to shrink its losses with improvement in economies of scale, which means, larger production volumes at lower input costs.

Moreover, the ever-growing need for strong and updated cybersecurity solutions are expected to keep the demand environment favorable for the S stock.

Earlier this week, Wells Fargo analyst Andrew Nowinski trimmed the price target on SentinelOne to $30 from $38 taking into account the broader market correction. However, for the longer-term, Nowinski remains bullish, and maintains a Buy rating. And it is still a Wall Street favorite, with a Strong Buy analyst rating consensus and around 100% upside potential.

Parting Thoughts

The Israeli tech scene has been very well known for the waves it makes and the rules it breaks. It is a booming hub of innovation that has churned out hi-tech powerhouses like advanced driver-assistance systems (ADAS) developer Mobileye which is now a part of Intel (INTC), software solutions firm Wix (WIX), and leading cybersecurity player CyberArk (CYBR), among numerous others.

2021 “the year of the unicorn.” However, 2022 is likely to be a year of retrospection for investors to see whether their investments can weather the storms this year holds.

Nonetheless, given the past records of the Israeli hi-tech sector, its resilience, government support, gritty leaders, and timely and well-thought-of policies, one can be at ease knowing that this, too, shall pass.

Partnered with TipRanks