This month has been a hard slog for growth stock investors. Three of the big ASX market darlings have come under intense attack from short sellers, sending their management teams scrambling to try and save their companies’ share prices from plummeting.
Logistics software company WiseTech Global Ltd (ASX: WTC), buy-now, pay-later fintech Afterpay Touch Group Limited (ASX: APT) and emerging identity and payments verification solutions provider iSignthis Ltd (ASX: ISX) are all facing unprecedented scrutiny from analysts and regulators alike right now.
As at the time of writing, both iSignthis and WiseTech are in trading halts as each company tries to deal with the fallout from separate – but equally scathing – analyst reports.
iSignthis shares have barely traded at all in October – the company’s shares were suspended from trading on 2 October and have remained that way all month with no definitive end in sight. It is dealing with accusations made by analysts from governance firm Ownership Matters that it manipulated its revenue figures in order to meet performance targets. Meeting the targets triggered the release of the rights to millions of dollars’ worth of shares to top executives.
WiseTech shares had barely emerged from a trading halt on Monday morning when the company requested the halt be reinstated. It had been savaged in two short-sellers reports issued by J Capital Research Limited, the first released last week and the second Monday morning, prompting WiseTech to reinstate the trading halt.
The first report alleged WiseTech had inflated its revenue numbers and overstated the amount of organic growth versus growth generated through acquisitions. The second report questioned the quality of WiseTech’s logistics software and claimed several of its major clients were dissatisfied with their service.
WiseTech has long pursued an aggressive acquisitions strategy, and its underlying organic growth numbers have been questioned before.
Notably, WiseTech shed close to half its market capitalisation after releasing its first half FY18 results in February 2018, despite reporting that it was on track to hit its performance targets. Those performance targets were set prior to the company making a series of apparently revenue accretive acquisitions, and so the fact that WiseTech hadn’t managed to exceed those targets led many investors to question the strength of the underlying business (or the value of the acquisitions).
The Afterpay share price has also been hit hard recently. Over the last week, its shares have plunged more than 20% to $28.66 as at the time of writing. Analysts from UBS slapped a sell rating on Afterpay, claiming that its share price would halve over the coming year as its business model comes under increased scrutiny from local and international regulators. This came less than a week after analysts from Morgan Stanley suggested Afterpay was a buy and set a price target of $44 for the stock.
Afterpay has long been a particularly volatile and sometimes divisive company – just look at the conflicting analyst reports for proof of that. Longer-term shareholders may also point to the fact that Afterpay has emerged relatively unscathed from its prior interactions with regulators as evidence that the company will continue to do so in future.
However, the reports against WiseTech and iSignThis are undoubtedly troubling for shareholders, as they make some quite serious allegations about the underlying business. For their part, both companies have vehemently defended themselves against any allegations of financial impropriety. But it does still make investors question the vastly inflated multiples that some of these ASX tech stocks are currently trading at. Last year, former Credit Suisse analyst Lucas Goode described WiseTech as the most expensive software stock in the world.
Long-term shareholders may view these events as simply minor blips on the road to further growth, and might even consider this correction in their share prices as an ideal time to top up their holdings at lower prices. Whatever your opinion of the allegations made against these companies, what this does really demonstrate is the importance of diversifying. Putting all your money into growth stocks can be exhilarating when things are going well – but these are also the stocks that can be hit the hardest by negative publicity.
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Rhys Brock owns shares of AFTERPAY T FPO, ISIGNTHIS FPO, and WiseTech Global. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and WiseTech Global. The Motley Fool Australia has no position in any of the stocks mentioned. 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.