The New Criterion: sizing up the runaway tech stocks
When it comes to the high multiple tech stocks with ‘cloud’ based subscription models, investors can’t be accused of taking the “Mr in between’ approach.
The profit reporting season showed that disappointing numbers from the up-and-coming tech plays have been met with resounding double-digit sell-downs, while upbeat results have been met with buying of a similar magnitude.
Overall, punters aren’t subscribing to the argument that the sector is in a valuation bubble waiting to be popped, a la tech boom of the late 1990s.
Developing a ‘software as a service’ (SaaS) model means spending big licks of money early on to ensure annuity subscription revenues later.
The benefit of SaaS businesses is that when they mature they throw out cash like it was last night’s garbage. That’s because each additional sub doesn’t entail much more cost, unlike manufacturing an item.
The key threat is that subscribers can cancel at any time, so keeping an eye on churn rates is paramount.
Altium (ALU) $36.83
The market’s love affair with Altium, one of the so called WAAAX stocks – remains unabated. The other WAAAX stocks are Wisetech Global, Appen (which produced a poor result) , Afterpay (which produced a blinder of a result) and trans-Tasman accounting software house Xero.
A global provider of electronic design software for printed chip makers, Altium posted what management dubbed immodestly as “outstanding” results: net earnings gained 41 per cent to $US52.9m ($79m), on a 23 per cent revenue boost to $US171.8m.
Never to do things by halves, San Diego based management is striving for market “dominance” not so much as mere leadership. With 43,600 subscribers, up 13 per cent, Altium is ahead of its target of 100,000 seats and $US500m of revenue by 2025.
Altium’s next big thing for the software geeks is a cloud-based platform called Altium 365, which it is currently rolling out. However the company is emphasising migrating current users to a basic freebie offering, rather than using the tool as a revenue cash cow.
Altium is not an easy company to understand, but we’ll defer to the market’s reaction that sent the stock $1.59, or 5 per cent higher on the day.
“We expect the short-term pricing volatility will continue as the market continues to wrestle with what an appropriate valuation is for this business,” says Ben Clark of TMS Capital.
“In the meantime, our view remains that if the longer-term targets are achieved, very attractive shareholder returns will ensue.”
Wisetech Global (WTC) $37.44
In the same specialist – or obscure - software category as Altium, Wisetech boasts all of the world’s top 25 freight forwarders as clients, as well as 43 of the top 50 third-party logistics providers.
To the glass-half empty brigade that may imply limited growth from now on, but CEO and 48 per cent shareholder Richard White assures us that Wisetech’s market penetration is still in the early stages “with significant runway for years to come”.
Wisetech shares gained 11 per cent after the company revealed full year net earnings of $54m, up 33 per cent on a 57 per cent revenue gain to $348m.
A former guitar stringer for bands including AC/DC and the Angels, White maintains a consistent tune with guidance of revenue growth of 26-32 per cent and earnings before interest, tax depreciation and amortisation (ebitda) growth of 34-42 per cent for the current year.
The stock trades on a hefty multiple of more than 100 times era, but at least we don’t have to use a tech-boom era revenue multiple as the yardstick.
Pro Medicus (PME) $36.47
Founded here in 1983, Pro Medicus is now a clinical leader in the US and Europe with its proprietary cloud-based software for large medical enterprises and individual practices.
In the US, Pro Medicus has signed up five of the top 20 hospitals and has won 14 of the last 17 tenders for new work.
Pro Medicus unveiled an 83 per cent rise in underlying profit to $22.7m, thanks to strong contract wins and rollouts in North America, Europe and locally.
The results – with the promise of further riches to come – sent the stock almost 10 per cent on the day, despite the company trading on a multiple of around 120 times.
Nearmap (NEA) $2.56
A long-time market fave, the aerial mapping provider is having a breather despite its US expansion continuing unabated.
Investors birched the stock by 30c, or 9 per cent on August 21 results day, despite Nearmap meeting its key numbers pre-announced on July 12.
Intriguingly, the stock fell 9 per cent on that day as well. As Kamahl posited, why are people so unkind?
Nearmap’s annualised contract value (ACV) climbed 36 per cent to $90.2 million. Management’s preferred measurement, ACV is the expected annual worth of customer contracts in place.
Nearmap’s revenue soared 45 per cent to $77.6m, while ebitda improved from $4.9m to $15.5m. But investors may have been perturbed by the reported loss rising 35 per cent to $14.9m.
While Nearmap’s churn levels and margins remain sound, some investors are wary about emerging competition (the company has a dominant position here, but competes with some big boys in the US).
“We operate within a competitive market in Australia, New Zealand and North America and we assume this competition will evolve over the next 12 months,” CEO Rob Newman warns.
Nearmap isn’t idly waiting for these rivals to crimp its wings, having launched a 3D version of its maps that allow users to measure distances and visualise what a city might look like.
Artificial intelligence based add-ons will allow for better detection of ground features and tracking of changes (such as the movement of coastlines) over time.
When Nearmap bifurcated from the patent protection mob Ipernica a decade ago, the shares were worth 5c.
Nearmap’s sell off from its $4.25 a share peak on June 20 looks like the correction we had to have, given where the stock has come from.
Nearmap is still valued at $1.25 billion and looks a couple of years away from posting a profit, but broker Citi is still convinced enough to ascribe a “target price” of $4.59 a share.
Infomedia (IFM) $2.28
Back in small-cap land – and that’s where most of these billion dollar stocks once resided - the car parts database and dealer servicing department tool is cruising in the fast lane.
Infomedia’s full-year profit surged 25 per cent to $16.1m, on a 16 per cent revenue hike to $84.6 million.
Management also guided to further double-digit increases in both revenue and earnings this financial year.
Great news, right?
Wrong. Something in the guts of the numbers didn’t quite gel, with the shares off 6.5c, or 3.4 per cent on the day. Or maybe it was a case of over-effusive expectations in the context of the stock soaring 50 per cent over the past year.
Infomedia has just bedded down its hard-won contract to supply Nissan parts in all geographies except for Japan. It’s also benefiting from its acquisition of data analytics house Nidasu, which enables the company to slice and dice data for car makers and dealers.
Infomedia forecasts double-digit revenue and earnings growth in the current year, which is no mean feat given the tough yardstick set in the 2018-19 year.
Infomedia has 170,000 users across 186 countries, so it must be doing something right.
With a market cap approaching $600m, Infomedia is trading on an earnings multiple of around 30 times: a modest valuation in tech stock terms.
Tim Boreham edits The New Criterion
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Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.