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What’s in store for WAAAX shares in 2020?

WAAAX shares have been favourites of investors in 2019. Australia’s equivalent to the United States FAANG stocks, WAAAX consists of technology sector shares WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Afterpay Ltd (ASX: APT), Altium Limited (ASX: ALU), and Xero Limited (ASX: XRO).

We take a look at what’s in store for these shares in 2020.

WiseTech Global 

WiseTech Global shares are currently trading at $24.66, up 45% over the year but well down from highs of over $38 seen in September. WiseTech came under fire from shortseller J Capital in October when the latter released a report alleging the company had overstated profits by as much as $116 million over 3 years. WiseTech shares tumbled in response and are currently trading at similar levels to June.

During FY19 and in the months since, WiseTech has made more than a dozen acquisitions across Europe, Asia, Australasia, and the United States. The purpose of these acquisitions was to allow access to market positions and technologies otherwise difficult to build. WiseTech has now secured 21 geographic foothold acquisitions spanning 30 countries and reaching 80% of global GDP and 74% of imports. WiseTech intends to continue to execute on smaller, but important, European economies and key remaining markets in Asia. Much of the heavy lifting in terms of geographic acquisitions has, however, been completed.

WiseTech has provided FY20 guidance of $440–460 million revenue with growth of 26–32%. Earnings before interest, tax, depreciation and amortisation (EBITDA) of $145–153 million is expected, with growth of 34–42%.

Appen 

Appen shares are currently trading at $23.37, up over 80% from $12.80 at the start of 2019. Appen provides data for use in machine learning and artificial intelligence. The company reported solid results for the first half of their financial year – 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.

An increase to 2019 full year earnings guidance was announced in November. Full year underlying EBITDA is now predicted to be $96–99 million, up from previous guidance of $85–90 million. The improved earnings forecast was driven increases in monthly revenues and margins, largely from existing projects with existing customers.

Afterpay 

Afterpay is currently trading at $29.20, up 143% from $11.98 in January. Afterpay shares had soared to over $36 in October on the strength of the buy-now, pay-later (BNPL) trend before recent regulatory concerns tempered highs.

Afterpay reported 6.1 million customers as at 31 October, up 137% from the previous year. Underlying sales in the 4 month period to 31 October were $2.7 billion, up 110% on the prior corresponding period and up 23% compared to the 4 months ending 30 June. Major brands that have recently joined the platform include Myer, David Jones, eBay (AU), Marks & Spencer, and Swarovski.

Current annual underlying sales are in excess of $8.5 billion and growing, with Afterpay on-boarding 15,000 customers a day, and customer lifetime value is improving as customers stay on the platform longer. Australian and New Zealand customers who joined in FY15–17 now purchase on average 22 times per year. FY18 and FY19 cohorts are purchasing on average 14 and 7 times per year, respectively.

In 2020, the Reserve Bank of Australia (RBA) will examine the impact of “no-surcharge” rules imposed by BNPL operators. According to the RBA, “an issue for the bank is whether policy action in relation to these no-surcharge rules should be considered.” Services such as Afterpay may become less attractive to consumers if merchants were able to impose a surcharge on their use.

Altium 

Altium provides software for the design of printed circuit boards that are used in most electronic devices. Altium shares are currently trading at $35.69, up 65% from $21.61 at the start of the year.

NPAT grew 22% in FY17, 33% in FY18, and 41% in FY19, so not only are Altium’s profits growing, but they are growing at an accelerating rate. Revenue in FY19 was up 23% in FY19 to $171.8 million, the 8th consecutive year in which the company has delivered double-digit revenue growth. Earnings per share were up 41% to US$40.57 cents.

Altium is seeking to achieve a position of market dominance. This will encourage secondary stakeholders such as parts and board manufacturers and distributors to adopt the Altium 365 platform. Altium’s vision is to transform the global electronics industry via a successful cloud-based platform for design, parts sourcing, and printed circuit boards.

Altium has set targets of achieving 100,000 subscribers and $500 million in revenue by 2025 and significant progress has been made towards these milestones. At the end of FY19, Altium had more than 43,000 subscribers. In FY20, Altium has provided guidance of revenue in the range of $205 million to $215 million, with an EBITDA margin in the range of 37–38%.

Xero 

Xero shares are currently trading at $81.47, up more than 90% from $41.95 in January. The small business accounting software provider boasts 2 million subscribers and leads the cloud-based accounting software markets in Australia, New Zealand, and the United Kingdom.

Xero delivered its half year earnings in early November. Highlights included a 30% increase in annualised monthly recurring revenue to NZ$764 million, and a 32% increase in operating revenue (up to NZ$338.7 million) compared to the prior corresponding period. Free cash flow was NZ$4.8 million up 14.6 million year on year. Net profit after tax increased by $29.9 million to $1.3 million. EBITDA excluding impairments of NZ$65.9 million was almost double the NZ$34.5 million achieved in 1H19.

Xero is seeking to drive adoption of cloud-based accounting software in the English-speaking market. While more than 50% of the addressable market has adopted cloud accounting software in Australia and New Zealand, only 20% of the addressable market has done so globally.

Xero intends to continue to reinvest the cash it generates to into the business to drive long-term value growth. Free cash flow in the financial year to 31 March 2020 is expected to be a similar proportion of total operating revenue to the previous year.

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Kate O'Brien has no position in any of the stocks mentioned. 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. 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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