WAAAX: A bubble waiting to burst?
By Kieran Labrakis
Published: 6th September 2020
Recently, we have heard a lot about how the American tech giants (FAANG for short) are trading at all time highs. These companies have become so valuable that they have enabled the S&P500 and the NASDAQ indices to reach record highs. It is likely too that their valuations can go even higher, especially after news about stock splits for Apple, making their share prices more accessible to more investors.
Over here in Australia, our ASX200 index is still down around 15% compared to pre Covid-19 levels. Only 75% of Australian companies reported statutory profits for the year to June 30 2020, which is the weakest performance by Australian listed companies in over a decade. Australia’s economy also contracted by 7% from April to June 2020, signalling the worst economic contraction Australia has incurred since records began in 1959.
Despite the ASX200 and the broader economy performing so poorly, since March 2020, Australia’s own version of FAANG, called WAAAX (WiseTech Global, Afterpay, Altium, Appen and Xero), have performed extremely well over the Covid-19 period. Since the beginning of March 2020, WiseTech Global has increased its share price by 65%, Altium by 15%, Appen by 50% and Xero by 34%. Afterpay has outshone its other WAAAX members though, with its share price increasing by 162%. Also, since its lowest point of $8.01 at the end of March 2020, Afterpay reached a high of $95.97 a share, indicating a return of almost 1100%!
So what exactly is causing Australian tech stocks to buck the Covid-19 trend? Have the WAAAX companies actually benefited from Covid-19? Or are we witnessing another tech bubble?
The following is a summary of each of the WAAAX companies’ business models, along with factors that justify their high valuations, as well as factors that indicate that these companies are overvalued.
WiseTech Global
WiseTech Global is a leading developer and provider of software solutions to the logistics industry. It has over 15000 customers in over 150 countries using its flagship product, CargoWise One. CargoWise One can be tailored to each customer’s supply chain and the software can also provide services such as HR management and online tracking and tracing.
The Good: WiseTech Global’s growth has mostly been due to its flagship product. As at June 30 2020, WiseTech Global delivered a 23% increase in its revenue for FY2020 and increased its EBITDA by 17% compared to FY2019. Despite the uncertain economic outlook, management has issued an earnings guidance for FY2021, suggesting revenue growth could increase between 9% and 19% and EBITDA could grow between 22% and 42%. Also, the company is in a good position to benefit from global trade returning to more normal levels in the medium term. CargoWise One is also considered to be one of the best products in the market, having a 99% customer retention rate.
The Bad: From June 22 to June 29 2020, WiseTech Global’s CEO Richard White sold $46 million worth of shares. Generally speaking, when a member of senior management, who is privy to non-public information, sells a large volume of shares, it indicates that potentially the share price of the company is overvalued, and thus they are cashing in whilst the share price remains high. Also, short sellers have argued that the company’s acquisition strategy from 2016 (WiseTech Global completed 33 acquisitions valued at $400 million and raised $436 million in equity capital) has helped management sell their shares at high prices to new investors whilst at the same time using the acquisitions to disguise the company’s true growth rates.
Afterpay
Afterpay is a buy now, pay later (BNPL) platform that allows consumers to purchase goods and services and pay for them in 4 equal, interest free, fortnightly instalments. Afterpay acts as an intermediary platform between retailers and customers. Afterpay charges retailers and merchants fees to offer the service to their customers, and charges late fees to consumers who don’t keep up with their payments. As at December 2019, 9% of Australians were using Afterpay. Afterpay has over 8.5 million users worldwide in the UK, the US, New Zealand and Australia, representing an increase of 5 million users in just 1 year.
The Good: Afterpay’s FY2020 revenue increased by 97% to $519 million (with $69 million in late fees), compared to FY2019. It also recorded a net loss of $22.9 million, which is a 48% improvement on its net loss reported in FY2019. With the increase in online spending due to Covid-19, and many retailers now offering Afterpay, online shopping sales in Australia grew by 35.4% compared to FY2019. Also, Afterpay recently announced an $82 million acquisition of Spanish firm Pagantis, in order to expand their current operations into Spain, France and Italy. Afterpay stated that the addressable eCommerce market in Europe is worth almost $500 billion and with its recent acquisition, it is well poised to profit from this market. Also, an average of 17,300 new customers signed up to Afterpay each day during FY2020, and this is expected to continue to rise substantially into the future.
The Bad: Afterpay founders Nick Molnar and Anthony Eisen recently sold $250 million worth of Afterpay shares, cashing in on the company’s high share price. Again, this could indicate that the share price is overvalued. Afterpay is also considered to be one of the world’s most highly valued loss-making companies. More recently, PayPal has announced their own BNPL platform to take on the likes of Afterpay. With this information public, Afterpay’s share price dropped by 8%. This could also indicate that Afterpay is vulnerable to other tech giants creating their own BNPL platforms which could halt their expansion plans and curb their expected future profitability. Also, a reduction in the value of Australian stimulus packages during September 2020 could curb Afterpay’s market rally. This is because consumers won’t be as inclined to spend as much money, but it increases the risk of a rise in bad debts for Afterpay, with consumers unable to pay their instalments.
Altium
Altium is a software company that provides PC based electronics design software for engineers who design printed circuit boards. It has over 51,000 customers globally. Altium most recently released a new software program, called Altium 365. It is a new cloud platform allowing users to collaborate across a range of devices.
The Good: For FY2020, Altium grew its revenue by 10% to US$189 million and recorded a 13% increase in EBITDA (US$76.63 million) compared to FY2019. On a pre tax basis, Altium’s profit increased by 12% to US$64.64 million. Altium also grew its dividend by 15% compared to FY2019, paying a full year dividend of AU$0.39. Management has also stated that it is committed to achieving US$500 million in revenue and 100,000 subscribers by FY2025. During the GFC, minimal effects were felt by PC based design software companies, meaning that if history is anything to go by, the continued economic slowdown/recession will have a minimal impact on Altium’s revenue and profitability.
The Bad: Altium’s profit after tax fell by 42% to US$30.9 million compared to FY2019, with management stating this was due to a one off accounting charge relating to its deferred taxes. Also of note was Altium’s operating cash flow, which fell 18% in FY2020 to US$56.5 million. This was primarily caused by Altium providing its customers with extended payment terms during the worst of the pandemic, as restrictions and lockdowns in the US, Europe and Australia triggered cash pressures for its small to medium business customers. Outbreaks of Covid-19 increase the risk of lockdowns and restrictions, potentially impacting Altium’s cash flow and overall profitability. Also, Altium is currently trading at a P/E ratio of 114.1x. Compared to the Australian software industry average of 34x, this indicates that Altium is significantly overvalued compared to its peers.
Appen
Appen is an Australian company that is a global leader in providing data for use in machine learning and artificial intelligence applications. Appen collects data on how humans interact with each other and technology and sells this data to government agencies, tech companies and even automotive manufacturers to help improve their machine learning and artificial intelligence software.
The Good: Appen’s 2020 half yearly results were positive. Revenue increased by 25% and EBITDA increased by 6%. The interim dividend also increased by 12.5% compared to the first half of FY2019. Appen’s business is poised to benefit from Covid-19 in the form of an increase in data needed to be inputted to make search, social media and eCommerce platforms more accessible to a larger group of consumers. Also, the majority of their staff (contractors) work from remote locations spread across 130 countries, meaning that Appen’s business can operate regardless of lockdowns/restrictions that may arise in different countries. The company also has $126 million in cash, meaning that it has adequate funds to weather any further Covid-19 impacts and has available funds to capitalise on opportunities that may arise.
The Bad: Appen is considered overvalued based on its P/E ratio. Appen is trading at 91.2x multiple, which compared to the Australian IT industry average of 19.5x, is considered highly overvalued. Also, Appen’s share price fell by 20% when its FY2020 half yearly results were published as investors were expecting a lot more growth from the company, further indicating that perhaps its future growth prospects may be overhyped by investors.
Xero
Xero is a New Zealand based company that offers an affordable cloud based accounting software platform for small and medium-sized businesses. It has over 2 million subscribers in Australia, New Zealand and the UK.
The Good: Xero’s revenue for the 12 months ending 31 March 2020 increased by 30% to NZ$718.2 million. The company also achieved its first ever profit. Xero’s profitability is expected to increase due to a shift toward cloud based accounting solutions in the short to medium term, fast tracked by employees working from home due to Covid-19 lockdowns and restrictions. Also, government stimulus packages targeting small to medium businesses have enabled companies to afford the transition to cloud based accounting platforms.
The Bad: Xero’s customers are small to medium businesses, meaning they are the most affected by the economic impacts of COVID-19. Potentially, new subscriber growth could be curbed, depending on how fast the economy recovers in the short to medium term which could impact Xero’s revenue. Existing small to medium businesses using the software could go bankrupt due to the economic impacts of COVID-19, further decreasing Xero’s revenue. Existing businesses using Xero’s product could also downgrade their subscriptions as they cut costs during this time. Furthermore, Xero has a P/E ratio of 4805x, which compared to the Australian software industry average of 34x, indicates that Xero is extremely overvalued by investors.
As can be seen with the above companies, there are always 2 sides to every story. But will WAAAX be able to deliver on their strong growth expectations and enable investors to achieve huge returns in the future? Or will it all end in tears? Only time will tell.
