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Beware: Watch for falling WAAAX!

21052019_falling tech stocks

Beware: Watch for falling WAAAX!

Do Australia’s rocketing tech stocks – particularly the so-called WAAAX stocks Wisetech, Afterpay, Altium, Appen and Xero – deserve their lofty premiums? The market certainly thinks so. But I’m not so sure.

I have previously alluded to the dangers of investing in the pointy end of the US technology boom and specifically warned about Uber. Uber has now listed its shares but its IPO price was below the valuation struck at the last private equity funding round. From original hopes of listing at a valuation of US$120 billion, Uber finally listed at less than US$75 billion. It is still an insane price for a company that may or not make a profit in the future.

But the hype that has virtually defined this bull market is not confined to the US. Here in Australia, both profitable and profitless companies have achieved extraordinary multiples.

Take the case of Appen, a company that crowd sources cheap labour to tag millions of photos, subsequently collated and fed into the search algorithms of clients including Facebook and Google.  Appen trades on an Enterprise Value (EV) that is 33 times its earnings before interest tax depreciation and amortization (EBITDA). What is most interesting about this number is that it is about four times higher than the multiple on which its near competitor, US-based Lionbridge, was purchased two years ago by Private Equity.

Back in 2016 Lionbridge was described as a Waltham, Massachusetts-based provider of globalization services to technology companies with more than 6,000 employees worldwide, serving more than 800 customers via its technology platforms and global base of more than 100,000 contract translators. Lionbridge’s customers included Microsoft, Google, Rolls-Royce, The Gap, HTC and John Deere.

In December of that year Lionbridge agreed to be acquired by US-based Private Equity Group H.I.G Capital for about eight times EV/EBITDA.

And even though neither Lionbridge nor H.I.G appear to have any business in Australia, they plan to list here in Australia this year. It doesn’t take a rocket scientist to work out the vendors are probably looking to take advantage of some of the world’s most ridiculous multiples ‘investors’ here are willing to pay.

But Appen isn’t alone at the top of the EV/EBITDA tree in Australia. Afterpay Touch trades at 294 times EV/EBITDA, Nearmap is at 109 times, Wisetech Global trades at 65 times, Altium is at 43 times, Superloop at 37 times and NextDC, Technology One, Fisher & Paykel and Jumbo interactive are all at between 25 and 31 times.

And even truly high-quality large cap business with decades-long histories have been dragged up in the rush to buy growth.

CSL is one of the Australia’s finest listed companies, and continues to grow thanks to demand for its immunoglobulin products rising faster than supply. But if we were to halt CSL’s growth and prevent it from ever raising prices, it would earn about US$2 billion. And if we capitalized this number at 8.5 per cent – a reasonable return for a business that doesn’t grow – we might be willing to pay US$23 billion for CSL. Currently however the market values CSL at US$63 billion. In other words, the market is currently willing to pay the equivalent of three current CSLs to buy one CSL with some growth.

Since 2014, the lowest price to earnings ratio CSL traded at was about 15 times. The average PE has been 25 times. Today, CSL trades at almost 31 times.

I don’t know when these companies will return to Earth in terms of their multiples but decades of experience tells me they always do. And when that happens it will be painful for many who have not experienced a correction.

For now, however, low interest rates and accommodative central banks will make sure cash in the bank is far less attractive than being invested in fast-growing companies. While that remains the case, it is probably the case that blind optimists will continue to look like winners.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Richard Benson

    I can understand your trepidation in investment in these tech stocks. I am similarly inclined. However young ? or more risk averse investors are doing very well and even with a significant pull back will still do well. One newsletter I know of is up about 50% this finyr which gives plenty of room to get out. Knowing which sector is in favour and running seems important and a few of these stocks in a portfolio can give big benefits. Valuation investment seems very blinkered if followed solely.

  2. The fact that a company as pedestrian as CSL is being bid up so far tells me we are in bubble territory. The RBA will cut rates soon, that will just accelerate the bringing on of the correction. I’m waiting with a big war chest, ready to go when the right prices come up. Until then, I think I’ll sit tight. Haven’t bought anything in over three years because it’s all been too expensive.

  3. Thank you Roger, I always found most tech stocks in Australia highly speculative and expensive. However, I don’t see any correction/cleanup in the overall market as such because of the low interest rates. People has no where else to put their money.

    Will interest rates ever go up, most likely never because the whole monetary policy and system is failing. There are lot of factors playing here – global supply of labor, automation, debt levels, lack of fiscal stimulus, purchasing power, etc. If the economy starts falling the next move will be cut interest rates that are already low or print money so the bubble may continue indefinitely. To find value in such market will keep getting difficult year on year.

    The central banks will not let the correction take place this is the reason it is one of the longest running bull market. It is like central banks who are owning the economy instead of governments.

    In each cycle the interest rates will keep hitting new low highs.


  4. Reminds me of Murphy’s law:

    Everyone has a scheme for getting rich that will not work.

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