When people talk about ‘WAAAX shares’ they are referring to a group of five ASX technology shares: WiseTech Global Ltd (ASX: WTC), Afterpay Ltd (ASX: APT), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), and Xero Limited (ASX: XRO). Because they are all technology companies, the WAAAX shares are often compared to the US FAANG stocks – Facebook, Amazon, Apple, Netflix, and Google.
What are WAAAX shares?
All of the WAAAX companies are listed on the S&P/ASX 200 Index (ASX: XJO) and are dominant players in their respective industries. Here’s a quick rundown on what each company does:
- WiseTech provides software used by the logistics industry globally. The company has grown rapidly through multiple acquisitions in recent years.
- Afterpay is the largest of Australia’s buy now, pay later (BNPL) providers, and has successfully expanded into New Zealand. Now the company is pursuing the UK and US markets.
- Appen develops human-annotated training data for machine learning and artificial intelligence. The high-growth artificial intelligence market relies on high-quality training data. Appen’s leading technology and track record of quality and reliability position it strongly in this market.
- Altium is behind software used to design printed circuit boards used in electronic devices. The internet of things has prompted a rapid rise in the number of interconnected devices, which Altium stands to benefit from.
- Xero provides cloud accounting software that is used by more than 2 million subscribers. The company has a global footprint with users in Australia, New Zealand, the United Kingdom, and North America.
Pros and cons of investing in WAAAX shares
WAAAX shares are seen as growth shares due to their increasing customer numbers and revenues. Many investors believe this will lead to increased profits over the long term, fueling dividend and share price increases. The Afterpay share price, for example, has increased exponentially since the company listed in 2017. This reflects increases in Afterpay’s customer numbers, which have grown to more than 10 million.
WAAAX shares have offered a high level of capital gains to investors over recent years. This high level of reward does, however, come with a high level of risk. Investors suffered painful losses when share prices crashed at the start of the coronavirus pandemic, although since then WAAAX shares have returned to their previous high valuations. These high valuations, however, mean that the shares trade on very high earnings multiples.
How can you invest in WAAAX shares?
You can invest in WAAAX shares by buying shares in all, or some, of the individual companies which make up WAAAX. Before you do so, you should understand these companies and the industries they operate in. Each WAAAX company operates in a different market and faces different competitive forces. As an investor, you will need to carefully consider the fundamentals of each business and assess whether you believe WAAAX shares can increase earnings in line with market expectations.
Another way of gaining exposure to WAAAX shares is by using an exchange-traded fund (ETF). Although currently there is not a specific WAAAX ETF, there is a proxy. Betashares S&P/ASX Australian Technology ETF (ASX: ATEC) tracks the S&P/ASX All Technology Index (ASX: XTX). WAAAX shares are major components of this index, which launched in early 2020. The All Technology Index includes a variety of ASX technology companies in addition to the WAAAX companies. This serves to provide diversification benefits beyond exposure to WAAAX shares alone.
Should you buy WAAAX shares?
This depends on your investment philosophy and your belief about their future prospects. Each WAAAX company benefits from different tailwinds, but equally must overcome individual headwinds. WiseTech has been relentless in its pursuit of growth, having made double digit acquisitions across Europe, Asia, Australasia and the United States in recent years. Now, however, it says much of the heavy lifting in terms of geographic acquisitions has been completed. Afterpay is the dominant player in the BNPL industry in Australia, but needs to repeat this success offshore, and has numerous competitors looking to steal market share.
Appen’s revenue growth has been underpinned by existing customers increasing demand. The company is now focused on expanding its customer base through significant investments in sales and marketing. Altium is seeking to dominate the printed circuit board design market, which will enable it to compel key industry stakeholders to support its agenda to transform electronic design. Xero’s strategic priority is to drive the adoption of digital accounting and build for global scale and innovation, but recent trading has been impacted by the coronavirus pandemic.
Ultimately, the decision to invest in WAAAX shares will depend on your belief about the future of the individual companies and your own risk profile. If you are a risk averse investor, WAAAX shares may not be appropriate as share prices can be volatile. On the other hand, if you are comfortable taking on more risk and believe these companies will outperform, WAAAX shares may be for you.