The popular WAAAX stocks – Wisetech, Appen, Afterpay, Altium and Xero - saw their collective market cap increase more than twenty-fold through the last three financial years. As of June 30, their average PE was well over 100 times FY20 expected earnings.
But after flying closer to the sun year after year, is the waaax now starting to melt? So far this financial year, the stocks are on average losing altitude. The question is whether this is just a temporary air pocket... or whether the feathers are coming unstuck completely.
We asked Shane Fitzgerald of Monash Investors Limited and James Gerrish from Market Matters / Shaw and Partners for their views to see if the Waaax is melting, or if these stocks could have higher to fly just yet.
Matthew Kidman: Welcome to Buy, Hold, Sell. My name's Matthew Kidman and today I'm joined by James Gerrish from Market Matters and Shane Fitzgerald from Monash and we're talking about the WAAAX stocks, Australia's equivalent of the FAANGs and if you were in WAAAX last year, portfolio 90%, but since June 30, they're actually down as a group. Interesting times. Shane?
Shane Fitzgerald: Yep.
Matthew Kidman: Wisetech Logistics Global. Terrific business. Subject of a short report recently. Buy, hold, or sell?
Shane Fitzgerald: We're going to sell on that one. We've seen what the short sell report is and they make some valid points. I think they're overplaying it a bit. That said, this company has done a lot of acquisitions and we're not convinced they've integrated all that well, and it's a bit hard to get a handle of all organic growth is. For us, given the valuations, it’s a sell.
Matthew Kidman: It was a wise play last year, James, but this year not so good. Buy, hold, or sell?
James Gerrish: Yeah, it's a sell for us. They've been priced for perfection. They haven't been priced for question marks over their accounting. Their numbers, revenue growth is strong, but that organic revenue line is what's the question mark for us. So, it's a sell Matt.
Matthew Kidman: Okay. Who would have thought linguistics is sexy? Appen, buy, hold, or sell?
James Gerrish: It's a hold for us. I still think the valuation at these current levels is still rich. It's come back from recent highs, but it's a hold for us at best.
Matthew Kidman: It's been the big tumbler since June 30 or around then. Buy, hold, or sell Shane?
Shane Fitzgerald: It's a sell for us as well. And mainly because it's so opaque business. When you want to back one of these WAAAX stocks, you want to be really confident that you can predict or have a stab at what the outlook is going to look for this and Appen is just very, very hard to get a handle on what actually it’s going to be, how it's going to keep on going on the panels. In this market, is it going to go up or down? Who knows? So, given it’s very hard to forecast this company, it's just too rich for us.
Matthew Kidman: Okay. And the bellwether for this end of the market, buy now pay later. Afterpay: buy, hold, or sell?
Shane Fitzgerald: It's a buy for us. Particularly given that the pullback we've had. With Afterpay, you've got all sorts of metrics, which you can use to forecast what you think the earnings are going to be in this company and even moderate success in the US there's a lot of value to be made in this company.
Matthew Kidman: Who would have thought such a simple concept would go global? Buy, hold, or sell?
James Gerrish: They're often the best. I've got a hold on a stock at the moment. Hold at best for me at the moment. $26 I think you'll be able to get it closer to 20. Obviously a phenomenal business growth in the US is going to be the main driver here, but I think 2020 is going to be a year of increasing regulation and increasing competition in that space. So it's a hold.
Matthew Kidman: Going from something we all know about to something we know little about, circuit boards. Altium: buy, hold, or sell?
James Gerrish: A great business and the market has bided up as a consequence, above $4 billion market cap, $200 million of revenue. So, it's a sell for me. I think it's too rich.
Matthew Kidman: Rich, or poor? Buy, hold, or sell?
Shane Fitzgerald: We're going to put a buy on that one. Phenomenal management team, really great product, really strong market share and new seats and new licences being issued. And with the momentums in the business now it's pretty clear they're going to hit their medium term 2020, 2025 guidance. Literally this month they've launched Altium 365, and if that product really gets hold and they can close that loop between the design, the parts and the assembly in the electronic space, you know, watch out. This could be very interesting coming.
Matthew Kidman: Okay, let's go to the quality and accounting software, Xero out of New Zealand. But once again, taking on the world. Buy, hold, or sell?
Shane Fitzgerald: That's a hold for us. The valuation's very full on that and yeah, the US it's growing, but it's not growing at the sort of the pace I think the market was anticipating it could grow at. They've had some change in management. They had to try to get it going again. So, I want to see how that plays out.
Matthew Kidman: Okay. Xero. It's accepted generally, very good product. Accepted in the UK, trying to get the US. Buy, hold, or sell?
James Gerrish: It's a hold for me. The next catalyst is going to be the 7th of November. First half result. US, UK, is the drivers for growth in this business. So they dominate in Australia, they dominate in New Zealand. It's those areas that are going to grow that business going forward. So, you know, at that result, they need to be doing subscriber growth above 25% to maintain its current valuation.
Matthew Kidman: So, WAAAX were expensive. They're a little bit cheaper. Who knows? They might get really cheap.
Timely review of the WAAAX stocks. Keep it up! Here's an idea - maybe run B/H/S on WAAAX with 2 or 3 sets of fund managers. That will provide a more rounded view which I suspect will be very useful for the community.
Thanks for the feedback Sr V, I guess the question I have is just how much WAAAX can we all take?? As a set of stocks they get a disproportionate amount of attention relative to the number of companies on the market. I suspect many people have made up their minds on these companies already ... thanks for watching.