An article in today's Australian Financial Review reports how a Goldman Sachs analysis of popular Australian growth stocks versus those in the rest of the world concludes that the Australian share market has the world's most expensive growth shares.
According to the AFR, Goldmans looked at companies worth over $500 million and expected to grow earnings at least 20 per cent pa over the next two years. The analysis reportedly concluded that Australian "high growth" stocks trade on an average price to earnings multiple of 39.8x, compared to a global multiple of 23x.
Indeed, you don't have to be a finance whiz crunching the numbers at Goldmans to see that a lot of Australia's most popular growth shares such as WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), AfterPay Touch (ASX: APT), SEEK Limited (ASX: SEK) and Pro Medicus Limited (ASX: PME) are trading at scarily high conventional price-to-earnings multiples.
Of course if a business can triple its profits every year for 2 or 3 years then even a price to earnings multiple of 100 is cheap.
Or even if a company can grow its profits at 20% pa for a decade (a big ask, but not impossible) then analysis suggests the shares should go up 6x in value or more over those 10 years.
Moreover, the biggest share market winners are likely to trade on permanently high price-to-earnings multiples if U.S. examples like Salesforce, Netflix or Amazon are anything to go by, as these are the businesses delivering consistent long-term 20% plus pa revenue or profit growth.
Of course price is what you pay and value is what you get, and I must admit on SaaS metrics (that are arguably often invented by companies or shareholders to justify valuations) the likes of Pro Medicus, WiseTech, SEEK and Appen are expensive.
However, it should be noted that the valuations of roughly comparable SaaS businesses in the U.S. (as the only other market that matters) have also rocketed recently.
For example U.S. SaaS businesses such as Okta, Shopify, Twilio, Workday and Atlassian have also all gone gangbusters over the last 12 months.
Arguably then it's the rise of SaaS businesses in the U.S. that is propelling the local SaaS firms higher as investors reassess valuations given some of these companies' outlooks.
Okta is a US$12 billion SaaS business for example that trades on 40x calendar year 2018's revenue of US$399 million with a forecast for revenue to hit up to US$535 million in the year ahead. While it's also forecasting a ballooning loss up to US$69 million in 2019.
So some of the SaaS WAAAX stocks actually look cheap compared to this, as they're profitable and trade on lower sales multiples.
Interestingly, Okta is due to hand in its quarterly earnings report tomorrow morning AEST, so shareholders across the SaaS sector might want to buckle up.
