Should you be afraid to invest in WAAAX stocks?

The big 5 ASX tech companies like Afterpay Touch Group Ltd (ASX: APT) have had a wild ride in 2019. Should you be scared of buying WAAAX shares?

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As a growth investor, tech stocks are at the top of my watchlist. This means I always have a keen eye on our nation's so-called 'WAAAX' shares. The term WAAAX encompasses a group of Australia's better-known technology stocks. Recently, weakness in global markets has had ripple effects on these tech companies.

Operating on sky-high valuations, WAAAX companies are acutely impacted by adverse market and company news. Does this drop in the share price put these companies in the buy zone?

WAAAX update

Analysts are anticipating a potential sell-off of Australian tech stocks. Valuations of WAAAX companies are at highs not seen since the period before the dot-com bubble burst in the 2000s. The prices of these highly demanded companies have cooled this week due to weakness in global markets. This could potentially create an opportunity for investors to buy at lower prices.

In the last two days:

WiseTech Global Ltd (ASX: WTC) is down 2.9% to a $22.62 close yesterday.
Appen Ltd (ASX: APX) is down 6.7% from a high of $25.98 to $24.23 as of yesterday.
Altium Limited (ASX: ALU) is down 7.4% from a $32.99 high on Monday, to its $30.55 close yesterday.
Afterpay Touch Group Ltd (ASX: APT) is down 6.7% from a $26.0 close to $24.38 yesterday.
Xero Limited (ASX: XRO) dropped only 0.32%, yet fell around 4.5% in the last 5 days to $59.21 yesterday.

Is this a buy opportunity?

WiseTech is a logistics company which sells an end-to-end software solution for the logistics industry. The company's recent share purchase plan suggests that management believed its shares were overvalued. Furthermore, insiders have been selling off their stakes.

The company's 140x price-to-earnings (P/E) ratio is one of the highest multiples across global markets. Perhaps this is not the time to buy WiseTech shares, although I'm very bullish on its long-term success. I'll be eyeing the price closer to the date in anticipation of its FY earnings announcement in August.

Appen has built a crowdsourced labour pool of remote workers who create data sets for clients. It has been committed to strong growth rates annually, averaging 25%. Appen also has a ROE of 30% which sits 15% higher than that of the IT industry.

Analysts always spark concerns around Appen's debt as it nears 40% of equity. However, Appen has a strong balance sheet with a 2.8x current ratio and 83% operating cash-to-debt ratio. This means Appen can manage its debt levels. Though it has a 63x P/E ratio, its proposition is indispensable with customers like Microsoft and Google relying on its technology.

Altium is a world leader in the creation of design software for printed circuit boards (PCBs). In FY18, its net profit surged 34% to $US37.5 million. This SaaS solution has 60% recurring revenue, meaning top-line profits are more predictable. It also has a strong balance sheet with $US58 million cash.

PCBs power the Internet of Things (IoT) movement, and with the exponential growth in this tech vertical, Altium will benefit lucratively. Though it has a high-flying 87x P/E ratio, no doubt this is one company that you should be holding for the long haul.

Afterpay has been hit hardest by the global tech sell-off. Its price-to-sales ratio has cooled slightly, falling to 36.8x from 39.6x just over a week ago.

This year, the company has been all but good news. Its expansion in the US and the European market have been highly successful to date. This 7.7% price drop certainly creates an opportunity for those bullish on the buy-now pay-later market.

Xero recently published its full-year earnings, which drove the stock price up almost 10% on the day of the announcement.

Xero boasts 1.82 million subscribers and a 31% growth year-on-year. Operating revenue is also up 36% and Xero experienced positive free cash flow of $6.5 million for the very first time. Excluding impairments, EBITDA is up a stellar 84% to $91.8 million for the year. This has largely been due to its success in its US expansion.

I think Xero's share price drop could be a great buy opportunity for investors.

If you're waiting for the tech industry to cool, perhaps you should take a look into this new industry vertical.

Audrey Thehamihardja has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, 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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