There's a lot of talk among investors focused on the local share market about the outperformance of the WAAAX stocks over the last few years.
As despite them being regularly labelled 'overvalued' or 'too expensive' by professional fund managers and market commentators they've continued to rocket in value for shareholders.
Let's take a look at just their one-year returns below:
WiseTech Global Ltd (ASX: WTC) up around 145% to $23.13
AfterPay Touch Group Ltd (ASX: APT) up around 306% to $23.40
Altium Limited (ASX: ALU) up around 65% to $32.85
Appen Ltd (ASX: APX) up around 155% to $22.81
Xero Limited (ASX: XRO) up around 54% to $50.64
In other words if you'd listened to any number of media commentators or self-styled 'value' investors over the past year (often these commentators possess little understanding of what's driving the companies' success) you'd have excluded yourself from some huge gains.
However, it's true that a lot of these businesses now trade on high valuations with plenty of downside risk, although plenty of commentators said the same thing last year – and the year before last.
On the WAAAX stocks it's worth noting that Appen and WiseTech are delivering a lot of their top line growth through acquisitions which comes with a lot of risk.
While AfterPay does not have a moat or pricing power as any deep-pocketed competitor could come along and offer retailers cheaper fees as a percentage of sales.
Therefore my preference among this lot remains Xero and Altium, although all these businesses are not rated highly for nothing!
It's also important to note that growth investors should not limit themselves to Australian companies.
As this would be a catastrophic mistake.
And I'm not exaggerating!
Fortunately my colleague and professional investment analyst Kevin Gandiya has put together a chart showing how some of the top junior US tech shares (ex-FAANGs, etc) have thumped the returns of the WAAAX stocks.
The TATOMA shares' returns over one year consist of:
Trade Desk Inc up around 317% to US$206.49
Alteryx up around 151% to US$84.76
Twilio up around 247% to US$129.79
Okta up around 120% to US$85.79
MongoDB up around 238% to US$142.79
Atlassian up around 117% to US$115.60
TATOMA vs WAAAAX div adjusted returns over the last year. Source: Kevin Gandiya as at March 28, 2018.
We can see the junior U.S. tech stocks have thumped the returns of the WAAAX shares and arguably have stronger moats and better valuations.
As such I'd suggest growth-oriented investors take a look at these businesses.
Another important point to note is that the junior US tech stocks represent just a tiny sample of hundreds of high-quality listed tech businesses in the U.S.
Whereas the Australian tech market is far, far, more limited in terms of good quality tech companies, which means a lot of capital is funnelled into them, sometimes with little regard to valuation.
This is because retail or institutional investors who want exposure to the software leaders in Australia have little alternative but to buy into them.
Foolish takeaway
Finally it's worth noting the role of interest rates in supporting the valuations of these tech shares, as low rates encourage investors to seek higher risk-adjusted returns, among other things.
In fact investing experts like Warren Buffett have regularly stated that whether the share market is over-valued or not currently simply depends on which way interest rates head in the future. We have already seen how rising rates in the U.S. over the final quarter of 2018 sent U.S. stock valuations tumbling.
As such investors should spread their risk into the blue-chip U.S. tech stocks as well, among other more defensive plays outside the tech sector.
For example tech leaders such as Facebook, Apple, MasterCard, Salesforce, and Google continue to offer excellent risk-adjusted value in my opinion compared to the tech leaders in Australia.
After building a core of profitable U.S. tech leaders in their portfolio investors should then look to U.S. tech juniors as higher risk bets before the over-crowded local tech sector.
