When people talk about WAAAX shares, they are referring to the group of five ASX technology shares that includes WiseTech, Afterpay, Appen, Altium, and Xero.
At one point, these tech companies were the market darlings of a thriving ASX tech sector. But a lot has changed over the past couple of years. Not the least of which is that Afterpay was acquired by United States tech company Block Inc (NYSE: SQ). Block Inc CDI (ASX: SQ2) now trades on the ASX, which means the acronym is no longer current. It should really be more like WABAX (or AXBAW?).
Whatever you want to call them, these tech companies used to be the hottest ASX shares around (and a couple still might be!). So, let's take a closer look at these companies and see whether they still live up to the hype.
An introduction to WAAAX stocks
In their heyday, the WAAAX companies were Australia's answer to the US FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google).
All (except Appen) are part of the S&P/ASX 200 Index (ASX: XJO) and are (or were) dominant players in their respective industries.
Here's a quick rundown on what each company does:
- WiseTech Global Ltd (ASX: WTC) provides software used by the logistics industry globally. The company expanded rapidly through multiple acquisitions, although its share price has been volatile recently
- Afterpay is still the largest and most well-recognised of Australia's buy now, pay later (BNPL) providers. After successfully launching in the US and the United Kingdom, the company was acquired by Jack Dorsey's multinational tech conglomerate Block for $39 billion in January 2022
- Appen Ltd (ASX: APX) develops human-annotated training data for machine learning and artificial intelligence (AI). The company has fallen significantly out of favour with stock investors, with its shares now down more than 90% from the peak price of about $40 in mid-2020
- Altium Limited (ASX: ALU) develops proprietary software used to design the printed circuit boards for electronic devices. The internet of things (IoT) has prompted a rapid rise in the number of interconnected devices people own (think Google Home), which has caused Altium's revenues to almost double over the past five years (to US$221 million by FY22)
- Xero Limited (ASX: XRO) provides cloud accounting software that is used by more than three million subscribers. The company has a global footprint with users in more than 180 countries, including Australia, New Zealand, the UK, and US.
The heyday of tech: How did the WAAAX shares come about?
Jump back only a few years, and the Australian tech sector was booming. Borrowing costs were low, and the ASX was in the late stages of the longest bull market in its history.
Afterpay was launching its operations in new (and lucrative) markets, like the UK and US, and WiseTech was merrily gobbling up junior tech companies, like Singaporean supply chain software company Containerchain (which WiseTech acquired for $92 million in 2019).
Even Appen was charming investors with promises of long-term growth thanks to its contracts with some of Silicon Valley's biggest tech companies, like Google and Meta Platforms Inc (NASDAQ: META).
Then the COVID-19 pandemic hit, and much of the world was locked down. We relied on technology more than ever to keep us connected, working, and entertained through long periods when we barely left our houses.
All these factors helped push the market valuations for tech growth stocks — particularly the WAAAX group of shares — into the stratosphere. But, sadly, it wasn't to last…
What happened to WAAAX shares, and where are they now?
Jump forward to the present, and things are looking decidedly less rosy for the ASX and growth shares in particular. Out-of-control inflation, and the rapid interest rate hikes from central banks to fight it, are hurting many sectors of the economy. Borrowing costs are rising, consumer sentiment is falling, supply chains are buckling, and the global geopolitical environment is — to say the least — tense.
All this economic and political uncertainty doesn't bode well for growth companies. Junior or growing companies do best when there is a general, shared sense of optimism about the future. Otherwise, investors just won't buy into their growth stories. If the world economy is a dumpster fire, but a tech company is telling you they're somehow going to double their revenues next year, chances are you're simply not going to believe them.
That being said, some of the WAAAX stocks have actually proved surprisingly resilient in the face of all this bad news. So, let's take a closer look at each of them to see how they have fared in this rapidly changing economic environment.
Early in the COVID-19 pandemic, when countries were hastily closing their borders and locking down their populations, the outlook for global trade and the logistics industry was particularly uncertain.
WiseTech shares plunged. They lost almost two-thirds of their value over the course of a single month and took the best part of a year to fully recover.
However, WiseTech's FY21 and FY22 results came in at the top end of their guidance ranges, and the growth outlook remains strong. So far, the company has proved itself to be resilient in the face of ongoing market challenges, and despite some recent volatility, its shares are currently trading at almost twice their pre-COVID prices.
Like WiseTech, Altium has proven itself to be remarkably resilient recently. Its FY22 results exceeded expectations, with revenue up 23% to US$220.8 million and net profit after tax (NPAT) of US$55.5 million.
Looking ahead, Altium expects its revenues to continue to climb in FY23 by 15% to 20%. And it has set itself an aspirational target of US$500 million in annual revenues by 2026.
Only time will tell if it can get there, but investors have shown some degree of faith in the company and its financial situation. Its share price has mostly traded sideways in the mid-$30s price range for the past few years, punctuated by a few peaks and troughs along the way.
When Afterpay announced that it was being acquired by Block in August 2021, the deal was hailed as one of the ASX's great success stories. A company, founded by two neighbours in suburban Sydney, had gone on to be sold for an eye-watering $39 billion to Silicon Valley tech magnate Jack Dorsey. It was the stuff of dreams.
However, since Block was listed on the ASX in January, its shares haven't fared quite so well. Rising interest rates, higher inflation, and lower consumer sentiment have taken the wind out of the sails of the BNPL sector recently. Block shares are down almost 50% so far this year.
The biggest disappointment of the WAAAX stocks is Appen. Since hitting a high of a little over $40 in August 2020, amid the COVID-19 pandemic, Appen shares have trended consistently down. They now trade for a little above $2.50 a pop.
It's a fairly stunning fall from grace and has come about as the outlook for the US tech sector has worsened significantly. Investors have feared Appen may start losing business from some of its biggest (and highest paying) customers.
And they may be right, as Appen has had to issue a series of earnings downgrades this year. The most recent was in October 2022, when the company stated that challenging operating conditions had resulted in lost revenue on several of its higher-margin core projects.
Accounting software firm Xero has had mixed fortunes over the past few years. Its shares soared during the pandemic, reaching a share price high of above $150 by late 2021. However, Xero has reversed most of those gains in 2022 and is now trading back below pre-pandemic levels.
After reporting a profit of almost NZ$20 million in FY21, Xero reported a loss of NZ$9 million for FY22, despite higher revenues and subscriber numbers. Investors may have been concerned about the company's high operating expenses, which jumped 39% year over year, and amounted to 84% of the company's revenues.
Looking ahead: Is the party over?
Macroeconomic conditions are currently not favourable for growth shares. This has caused the prices of some of the WAAAX shares — Appen, Block, and Xero in particular — to fall precipitously recently. However, others — notably WiseTech — have continued to deliver strong results despite the challenging market conditions, and have seen their stock prices continue to rise.
While the near-term outlook may be particularly uncertain, investors should always consider the longer term. No one has a crystal ball, but if you continue to believe in the business models and the potential of the WAAAX shares, these recent falls could represent fantastic buying opportunities.
How can you invest in WAAAX shares?
You can invest in WAAAX shares by buying stocks in some or all of the individual companies that 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 was 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?
Ultimately, the decision to invest in WAAAX shares will depend on your beliefs 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 stock prices can be volatile. On the other hand, if you are comfortable taking on more risk and believe these companies will outperform in the future, then WAAAX shares may be for you.