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ASX tech update: WAAAX on or WAAAX off?

Australian investors have adopted the WAAAX acronym to describe the hottest tech stocks listed on the ASX. WiseTech Global Ltd (ASX: WTC), Afterpay Touch Group Ltd (ASX: APT), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO) make up the esteemed group.

Recently, the share price of most WAAAX stocks has come under pressure, which could present a buying opportunity.

What has affected the WAAAX share price recently?

The share price of WAAAX stocks have suffered on the back of both local and global catalysts. Locally, the extreme valuations of some growth companies have come under scrutiny, attracting increased short-seller interest from institutions. In addition, global pessimism regarding future growth has re-opened the case of switching from growth stocks to value stocks.  

Have WAAAX shares been over-valued?

The WAAAX basket of stocks have risen around 350% over the last 2 years (to 30 September) and trade at an average multiple of more than 100 times earnings. Following J Capital Research’s attack on WiseTech, shares in technology companies have been savaged.

Research firm J Capital accused WiseTech of using clever accounting tricks to inflate growth and overstate profits. The report saw the company’s share price get trashed and triggered selling in other big technology names trading on high price-to-earnings multiples.  

The carnage was not limited to WAAAX names, with other growth shares like Pro Medicus Limited (ASX: PME) and Jumbo Interactive Ltd (ASX: JIN) falling 23% and 26%, respectively, since 21 October.

What else has triggered selling in growth stocks?

Strong macroeconomic factors have also fuelled pessimism about future global growth. US 10-year bond yields have spiked since late September, with sentiment flowing to the equity markets. In addition, weak IPO interest in the US and pessimism about trade relations have taken momentum from growth stocks. These factors have culminated into a perfect storm and raised uncertainty about the future growth prospects of speculative technology stocks.  

Should you buy?

In my opinion, investors should be wary of catching a falling knife. Although the share price of these quality tech stocks have been smashed, no one knows if there is further downside.

I think a prudent strategy would be to wait for price action and money flow to consolidate before making an investment decision.  

If you think there is further downside in WAAAX stocks, here are some other growth names you could buy instead.

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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Jumbo Interactive Limited and Pro Medicus Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of Altium, Appen Ltd, WiseTech Global, and Xero. The Motley Fool Australia has recommended Jumbo Interactive Limited and Pro Medicus Ltd. 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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