As previously highlighted on BRIDGE, the easing of monetary and fiscal stimulus following the pandemic has underscored the cyclicality of long-duration assets. This has been particularly evident in sectors such as software and renewable energy, with the internet content & information industry fitting the same pattern.

This industry, characterized by a higher median growth rate and gross profit margin, also bears costly operating expenses, largely driven by significant investments in R&D. With razor-thin median net income margins, the industry's focus on growth over profitability became increasingly evident as investor preferences shifted toward more profitable companies.

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

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Central banks’ delayed response to overheating economies further fueled money supply expansion and speculative investor behavior, leading to stretched valuations, particularly in high-growth sectors.

Despite a much lower debt profile than companies in the underlying sector [Communications Services, 1/5th sector median], synonymous with lesser margins contractions linked with higher financing cost, the industry underperformed the reference sector and the market by over 20% and 50% respectively over a 3-year period on an equal weight basis.

The 5-year chart further emphasizes the industry's cyclicality, as the initial positive spread that followed the rise in money supply quickly faded as quantitative tightening measures were introduced.

At a more granular level, rising discount rates had a pronounced impact on valuations, given that earnings for many of these companies are projected far into the future. Furthermore, the initial spike in valuations was partly driven by the short-term extrapolation of demand, linked to pandemic-related shifts in consumer behavior.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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Without any major medium-term tailwinds at the industry level, mechanical compression of relative valuations was inevitable. That said, some notable outliers have emerged. Meta Platforms and Spotify, for example, saw improved investor sentiment following well-received operational discipline and cost-cutting measures.

Additionally, large-cap companies continue to trade at a premium, buoyed by expectations of the AI boom, which promises higher margins through reduced operating expenses and growing sales fueled by AI-driven features. As the economic easing cycle takes hold, an arbitrage opportunity may be on the horizon.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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