A consensus is building in markets around global economic expansion, QE curtailment and an upward trajectory in rates. The OECD’s September 2017 outlook statement described it as “a synchronised short-term global upturn” with the recovery being “broad-based”.
Consistent with this rhetoric, the OECD’s forecast for 2018 global GDP growth was revised up to 3.7% from June (3.6%), the highest level since pre-GFC. They added the caveat, however, that “sustained medium-term growth is far from secured”. The GFC continues to cast a long shadow.
Growth vs Value? 3 ways to rationalise the current paradox
With this in mind, a question for equity investors is the perennial: growth vs value? Conventional wisdom would have it that with economic activity accelerating from the desultory post-GFC years, and with interest rates on the march (US 10-year yields up 100bp since June 2016), value should be outperforming growth and defensives. However, that has not been the case.
Rationalising this apparent paradox probably comes down to three factors:
- technological disruption (SaaS/cloud);
- the performance of FAANG (FB +27% vs S&P 500 since June 2016, AAPL +48%, AMZN +28%, NFLX +73%, GOOGL +20%); and
- quant’s preference for momentum over value.
Many tech names have been re-rated on the back of FAANG. Indeed, the S&P 500 now has more names at EV/sales > 10x than at any time since 2000 (8% of the index).
In Australia, 8% of the Small Industrials ex REITs is also on EV/sales > 10x. To us this is worrying, notwithstanding the digital paradigm.
A justified premium or hopelessly overpriced?
Focusing on one Australian SaaS name – Wisetech (WTC), a global leader in logistics SaaS. Its track record is strong and it has M&A potential.
Nonetheless, does it deserve to be rated as it is (13x EV/ FY 19 sales) – possibly the highest-priced maturing SaaS name in the world?
This is representative of the question investors in most of these highly-rated tech names need to ask. In some cases, the answer will be that the long-term growth profile justifies the high near-term rating. In many other cases, the answer will be that the name is just hopelessly overpriced.
Time will tell.
Wisetch vs Global SaaS
Source: Factset, Avoca
Avoca Investment Management was established in 2011 by John Campbell and Jeremy Bendeich in partnership with Bennelong Funds Management. The team is focused on capital preservation through prudent, long-term investment in emerging leaders.
No areas of expertise
good, thank you
Thanks for your article. I look forward to my Livewire email each morning and it's not every day I read an article which totally challenges my thinking - and that is principally in relation to your classification of Wisetech as a "maturing" company. I guess we're all "maturing", and every company could be considered as either "mature" or "maturing". However, in my mind, I had never placed WTC anywhere near either of those categories. As I age, I remind myself of the slogan "You can only be young once, but you can be immature forever"....and I guess that is the category I have placed WTC in. This is based on a whole host of factors, not the least being referencing Cargowise against the incumbent "over mature" systems WTC is actively disrupting. In terms of the sales growth profile in your table is WTC anywhere near "mature"??...in terms of market penetration??...in terms of how they see themselves (Changing the world of logistics one innovation at a time)?? Then your article got me thinking about EV/sales ratios. Only last night I was re-reading the Aconex AGM transcript and pondering on their focus to drive global sales and the expenditure they are committing to do so. This led me to reflect on Wisetech's prioritisation of research over sales and marketing - "The best technology sells itself so you don’t need to spend a lot on sales and marketing” ( Richard White). Seeing your table reminded me that 28% CAGR is not too shabby in that light. Each to their own valuation, and I'm sure you have undertaken a more detailed valuation of WTC than I have. However my point is EV/sales is a very simplistic comparison to make here. I note your article is from Avoca's latest "Performance Report" which notes "our performance over the last three months has been negatively impacted by continued PE expansion and excessive valuations of stocks we do not own". I understand that. I respect that....and that got me thinking that maybe that is why WTC is a laggard in my own portfolio??? (I realise that is unfair as I am not managing other people's and as an individual investor I can be more nimble when the party ends).