Some of the gloss seems to have come off the WAAAX stocks – the exclusive club of Aussie shares known for their ‘high-tech’ business models. Until last month, the WAAAXers – that’s WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), Afterpay Touch Group Ltd (ASX: APT) and Xero Limited (ASX: XRO) – were some of the ASX’s best and most consistent performers.
Even after losing some skin in October (WiseTech and Afterpay in particular), all of the WAAAX shares are still up double digits in 2019 so far.
But these companies are often criticised for their sky-high valuations. Both Afterpay and Xero have yet to become consistently profitable, and Appen, Altium and WiseTech trade on earnings multiples of 52.7, 55.5 and 155.7 respectively – well above the current market average of 18.
In my view, these ratios are extreme. I hear all kinds of justifications for continued investment at these levels, everything from earnings distortions (due to their high-tech, low capex business models) to mind-blowing growth runways.
WAAAX vs. FAANG
But I thought it would be interesting to compare our WAAAXers with the original acronym club – the US FAANG stocks. If you don’t know, FAANG is a nickname given to Facebook, Apple, Amazon, Netflix and Alphabet (Google) – the well-known American tech highflyers.
These are some of the most profitable companies in the world, and also with some of the biggest accepted potential growth runways (despite their massive sizes).
Currently, Facebook is trading on an earnings multiple of 30.44. Apple is sitting at 21.9, Amazon at 79, Netflix at 92.5 and Alphabet at 28.5.
You can see here (with the exception of Netflix and Amazon) that the ASX is placing a higher premium on all of our WAAAX shares than the US markets are placing on their FAANG stocks. This is a further red flag for me and I still think that there is more downside risk with our WAAAXers than upside at these levels.
I might sound a little bearish (and unpatriotic) on the WAAAX stocks, but I think this simple experiment does sound some warning bells. If you are indeed considering an investment in the ASX’s favourite tech darlings, I would simply urge you do your research. Absolute confidence in the future earnings runway of your chosen company is simply a must at these prices – because you don’t want to get caught short, believe me!
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sebastian Bowen owns shares of Facebook. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Facebook. 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 Facebook. 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.