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Why I’m now being patient with the ASX tech sector

The ASX tech sector has shot up again today with the US Federal Reserve Chair, Jerome Powell, saying the US was getting close to a neutral rate. I’m going to be patient when it comes to ASX tech share valuations.

Just today:

The Altium Limited (ASX: ALU) share price is up 8.8%.

The Afterpay Touch Group Ltd (ASX: APT) share price is also up 8.8%.

The WiseTech Global Ltd (ASX: WTC) share price is up 5.6%.

The Appen Ltd (ASX: APX) share price is up 3.5%.

The Xero Limited (ASX: XRO) share price is up 3.2%.

Altium and Afterpay are certainly today’s big winners, but all of them have gone up by more than the overall ASX All Ords index.

It seems that because interest rates might be slightly less than expected, these tech businesses are worth a lot more in a single day. Obviously, the intrinsic underlying values haven’t changed that much.

One of Warren Buffett’s key lessons about investing is that patience is integral. We can wait for the right valuations to come along. Some of the tech shares are trading at very high valuations:

Xero is trading at 149x FY20’s estimated earnings.

Afterpay is trading at 105x FY20’s estimated earnings.

WiseTech is trading at 71x FY20’s estimated earnings.

Altium is trading at 36x FY20’s estimated earnings.

Appen is trading at 26x FY20’s estimated earnings.

Xero is a special case because it is trying to remain cashflow breakeven. It’s not trying to make a profit yet, like Amazon.

It’s up to us to decide what price we want to pay for shares. We don’t have to grab at every opportunity.

All of these tech shares are delivering excellent revenue growth and they are high quality businesses. I wish I had bought shares of them all a few years ago!

But, the key part of determining returns is the entry price, is today’s price the right one to buy at? The higher price you pay the lower prospective returns.

There could be several ASX options out there better priced than Afterpay today.

Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, WiseTech Global, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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