Australia's WAAAX shares are the equivalent of the United States FAANG stocks – tech shares trading on high multiples and carrying the hopes and dreams of investors.
WAAAX consists of WiseTech Global Ltd (ASX: WTC), Appen Limited (ASX: APX), Afterpay Touch Group Ltd (ASX: APT), Altium Limited (ASX: ALU), and Xero Limited (ASX: XRO).
For most of 2019 this group have been market darlings, but lately the gloss has started to come off WAAAX stocks. Afterpay has been hit with regulatory concerns and WiseTech has been the subject of damaging reports by short seller J Capital. So which WAAAX shares are worth buying?
WiseTech
WiseTech's share price has dropped 25% to around $26.43 in October following reports from J Capital that accused the technology company of overstating profits and growth. WiseTech hit back at the reports, which it labelled 'misinformation' with CEO Richard White stating, "we are very concerned that claims in this report may mislead and manipulate the market."
WiseTech provides operating systems to logistics companies worldwide. Their primary product, CargoOne, streamlines and automates the operations of supply chain providers. WiseTech has been on an acquisition spree over the last few years, snapping up 34 companies for some $409 million.
WiseTech have provided guidance for FY20 revenue of $440 million to $460 million, with revenue growth of 26–32%. Earnings before interest, tax, depreciation and amortisation (EBITDA) is predicted to be $145 million to $153 million with growth of 34–42%. These figures are now, however, under a cloud of doubt following J Capital's report.
J Capital claimed that WiseTech's purported organic growth rates of 25% were in reality closer to 10% and that profits had been overstated by as much as $116 million over 3 years. The short seller called WiseTech's stream of acquisitions "a frantic effort to maintain the narrative that this is a fast-growing technology business."
Appen
Appen shares have risen 82% to around $22 over the course of 2019 and trade at a price-to-earnings (P/E) multiple of around 55. Appen provides data for use in machine learning and artificial intelligence. Using its global network of more than 1 million contractors to annotate and label data sets, Appen provides these data sets to clients, who use them to build AI systems.
Appen reported solid results in late August for the first half of their financial year. Not, however, promising enough for investors – the stock was sold down from $27.37 to $24.27 when results were reported. Revenue was up 60% to $245 million, with underlying EDITDA up 81% to 46.3 million. Underlying net profit after tax (NPAT) was up 67% to $29.6 million with statutory NPAT up 33% to $18.6 million. Perhaps the reason the stock was sold down was because growth had slowed – in FY18 revenue grew by 119%, underlying EBITDA by 153%, and statutory NPAT by 192%.
Afterpay
Afterpay shares dropped 17% to around $29.40 in October as fears of increased regulatory scrutiny weighed in investors. The buy-now, pay-later (BNPL) provider will be a focus of an upcoming review of card payment regulation by the Reserve Bank of Australia (RBA). Merchants that offer Afterpay are forbidden from passing on the cost of the service to customers. The RBA has flagged that it will consider whether policy action in relation to this no-surcharge rule should be considered.
Afterpay shares had previously risen a stunning 200% during 2019, driven by increasing take up of BPNL services. The company reported a 140% increase in underlying sales, a 130% increase in active customers, and a 101% increase in active merchants in FY19. Afterpay's total income for FY19 was $264.1 million, up from $142.3 million in FY18; however, an after-tax loss of $43.8 million was reported for FY19 compared to $9 million for FY18.
Altium
Altium shares are up more than 50% over the course of 2019, trading at around $32.62 and a P/E multiple of 56. Altium provides software for the design of printed circuit boards that are used in almost all electronic devices. Altium operates on a subscription model and, as at the end of FY19, had 43,698 subscribers, an increase of 13% over the previous financial year. Altium is aiming to grow to 100,000 subscribers and $US500 million in revenue by 2025.
The company believes in maintaining a clean balance sheet and has been able to finance its growth using equity. Currently debt free, sales increased by 23% in FY19 to $US177.2 million led by China, which recorded growth in revenue of 37%.
Revenue has grown steadily over the past several years and was up 23% in FY19 to $US171.8 million. EBITDA has also grown steadily and was up 26.5% in FY19 to $US62.7 million in FY19. NPAT increased by 41% in FY19 contributing to a 41% increase in earnings per share. A dividend of AU 34 cents per share was paid in FY19, an increase of 26% on the previous year. Altium currently has a dividend yield of 1% and is focused on growing dividends each year.
Xero
Xero shares are up 60% so far in 2019 and are currently sitting around $67. The small business accounting software provider recently expanded its partnership with UK-based GoCardless to North America. The GoCardless and Xero integration automates payment collection and reconciliation to improve cash flow and reduce business administration.
Xero leads the cloud based accounting software markets in Australia, New Zealand, and the United Kingdom, and boasts 1.8 million subscribers. Annualised monthly recurring revenue increased 32% in FY19 to $638 million, while total operating revenue for the year was up 36% to $552.8 million. EBITDA was up 52% to $73 million. A net loss after tax of $27 million was, however, recorded, up slightly from FY18's $24 million. Nonetheless, Xero recorded its first positive free cash flow result in FY19 of $6.5 million, equivalent to 1.2% of FY19 operating revenues.
Foolish takeaway
These tech stocks have been much loved by investors in 2019 and can trade on high multiples when they are profitable. But as WiseTech and Afterpay have shown, when doubts enter the mix investor support for high share prices can rapidly evaporate.
Xero is growing rapidly but doesn't turn a profit. WiseTech and Afterpay can be snapped up at lower cost than recent prices but have had potential risks exposed. Appen is growing fast, but not as fast as it was. Altium is low yielding but has big ambitions.
So, which WAAAX stock should you buy in November? I'm favouring Altium and Appen right now for their profits and dividends, but now could also be a good time to catch WiseTech and Afterpay at a discount.
