Why are Israeli tech stocks lagging behind Nasdaq?
Why are Israeli tech stocks lagging behind Nasdaq?
An index built by venture capital fund Viola Group, which includes Israeli high-tech companies issued in the US in the last decade, reveals that despite impressive growth rates and stringent expense management, Israeli public companies are undervalued in the market, presenting a distinctive opportunity
Israeli high-tech companies listed on Wall Street over the past decade are facing a challenging reality, as revealed by Viola Group's newly constructed index. Named the Israeli Technology Index (ITI), the index tracks approximately 30 Israeli tech firms, including industry giants like Mobileye and Wix. However, despite their notable presence, the ITI has shown a concerning trend - a 35% drop in 2023 alone, contrasting sharply with Nasdaq's 38% surge. While some argue the underperformance stems from premature listings or SPAC mergers, Viola contends it reflects broader undervaluation of Israeli tech, signaling potential opportunities amidst market fluctuations.
Viola, one of Israel's oldest venture capital funds, built the index to examine the stock performance of younger companies, including those in the fund's portfolio, compared to the general Nasdaq index and the more specific index of cloud companies (EMCloud). At this stage, the data is not particularly encouraging - the index shows that the historical underpricing of Israeli companies - typical of two decades ago - has returned. While in the last two years, the Nasdaq fell by only 5% and the cloud companies index fell by 25%, Viola's Israeli index suffered a 35% drop. In 2023 alone, the year of stock market recovery, Israeli stocks recovered less than American stocks. Nasdaq jumped by 38%, the cloud index by about 30%, while the Israeli index rose by only 15%.
Israeli stocks are also underperforming despite maintaining higher growth rates in the past two years relative to the average of companies in the general indices, and also having spent less. Despite the perception that American tech companies have laid off higher percentages of employees, there was actually a hiring increase of 11% among cloud companies and a 3% rise in companies traded on Nasdaq, whereas Israeli companies reduced their workforce by 9% in 2023.
The Viola index, shared here for the first time, is called ITI (Israeli Technology Index) and tracks the performance of about 30 Israeli technology companies traded on Wall Street, including Mobileye, Wix, monday.com, Oddity, Taboola, Riskified, Lemonade, Playtika, Global-e, SolarEdge, JFrog, Payoneer, CyberArk, Fiverr, and others. This is actually the first index tracking the behavior of public Israeli tech companies, similar to the EMCloud index, which monitors the performance of cloud companies traded on American stock exchanges. Like this index, the Israeli index also updates quarterly with the entry of new companies. The index measures the strength of companies based on their size. Recently, ןronSource and NeoGames were delisted from it due to their sale and removal from trading.
The main question is whether the weak performance of the companies in Viola’s new stock index is indeed because they’re Israeli, or because a large number of the companies in the index were issued too early. On one hand, the index does not include some of the oldest and largest Israeli companies on Wall Street, such as Check Point and Nice, which behave similarly to the general market and are traded at similar or even higher multiples. On the other hand, about a third of the companies in the new index were companies that were listed through SPAC mergers in 2021. Many of these companies have seen poor revenues and heavy losses, performing far below what they presented to investors before their SPACs.
But Viola is convinced that this is because these are Israeli companies, and as a result, sees the current underperformance as an opportunity. "We've returned to a situation of underpriced Israeli companies on Wall Street, like in the 1990s and early 2000s," Viola Founding Partner Harel Beit-On told Calcalist. "In the past, Israeli companies were considered inferior to American companies and traded at 20-30% less, but over the years the value has improved to the extent that in 2021 there was a premium on Israeli companies. In the past two years, even before the war and political upheaval, we saw a changing trend, which was exacerbated by the political situation and, of course, the war.
“Throughout this time, Israeli public companies have actually done everything right: from maintaining a high growth rate to budget discipline. Israeli companies have never missed quarters due to the geo-political situation here. As a result, in my opinion, Israeli companies are in reality much better and stronger than what is reflected in their current market values. This value comes from the fact that Israel's technological brand has been significantly damaged and needs to be revived."
However, while Viola's view regarding larger companies may be correct, the lower third of the index challenges these assumptions. This includes many automotive companies, such as Arbe, Innoviz, or REE, which are not related to the cloud sector and also have no real revenue. In addition, the index includes SPAC stocks, companies like Hippo or Pagaya, which are historically unpopular among investors.
Beit-On dismisses this explanation, pointing out that even in the cloud index there are many companies issued through SPACs. "It’s true that there are companies in the Israeli index that went public too early and are too small for the public market, but their weight in the index is very small. With the larger companies, there is a clear separation between Israeli and other technology companies.”
