Opportunities in the aftermath

Survival of the fittest Growth investing got many doses of reality in 2022, and will have to swallow more bitter medicine this year. As unfortunate as this has been, we think it will result in a healthier marketplace, similar to the aftermath of the bursting of the tech bubble. Just like the slow adoption of personal computers, cell phones and the internet then, recent euphoria about “what could be” has dissipated. But this is the norm for innovation. Like all businesses, pioneers must endure a range of economic environments to be long-term winners. Last year simply accelerated the process. Many current disruptive technologies, such as electric vehicles and comprehensive home delivery, are the future. But only the most fit—and nimble—companies will remain. 2023 should be a good year for growth investors willing to dig into business models and challenge CEOs to identify the companies that can emerge to flourish in the next stage of the cycle.

Back to the basics Sky-high equity valuation came down to Earth in 2022. Too much money chased narrow parts of the market, exemplified by the software and biotech/health care sectors. But the pendulum may have swung too far. For instance, many software firms now trade at price-to-sales level not seen in a decade and nearly half of small-cap biotech companies are selling below cash. But you still have to choose the right stocks, and wise investors will focus on fundamentals. Biotech will need more data breakthroughs and software will need spending to for sustainable growth.

New, shiny…and now cheap After hitting all-time highs of issuance and money raised in 2021, the frenetic IPO/SPAC market calmed down last year. This is also typical of the capital market cyclicality, and the next step is often full of opportunities for buyers. In 2023, investors should be on the lookout for steals. Many private companies have been funded in excess and valuations are plummeting. Conversely, precarious funding might force some companies to go public sooner than expected—and at a discount. For growth investors who can be opportunistic, deals in the IPO market may create tremendous potential over the longer term.