Never ones to let our American friends have all the glory (vale Bob Hawke), we Aussie investors have our own version of the American 'FAANG' stocks – the so-called 'WAAAX' shares. ASX investors love WAAAX stocks and are very proud of them – you'll more often than not find at least one WAAAXer in the average portfolio these days.
WAAAX and FAANG
WAAAX is a term popularised over the past 2 years or so and of course stands for WiseTech Global Ltd (ASX: WTC), Afterpay Touch Group Ltd (ASX: APT), Altium Limited (ASX: ALU), Appen Ltd (ASX: APX) and Xero Ltd (ASX: XRO) – collectively our own ASX tech darlings.
For those of you who don't know, FAANG is an acronym that has been around for many years now and refers to the US tech giants Facebook, Apple, Amazon, Netflix and Alphabet (which used to be called Google – FAANG sounds better than FAANA, after all).
Interestingly, if you had invested in a basket of FAANG stocks over the past year, you would have done ok, but the same investment in a WAAAX basket would have netted you a triple digit return.
Should you go all in on WAAAX?
Before you throw caution to the wind and bet the house on Afterpay, here are some sobering statistics, which should make a WAAAX bull shiver.
When it comes to valuing a share, a common metric used is the price-to-earnings (P/E) ratio (which divides the share price of the company by the earnings-per-share generated). Bear in mind your typical P/E ratio is between 10–30.
The FAANG stocks all have pretty reasonable P/E ratios at the current time (possibly excepting Amazon and Netflix):
- Facebook is sitting on 26.94, with earnings of US $29.23 billion (2018)
- Apple on 16.81, with earnings of US $81.8 billion
- Amazon at 101.91, with earnings of US $27.76 billion
- Netflix on 139.91, with earnings of US $9.26 billion
- Alphabet (Google) at 26.32, with earnings at US $35.36 billion
Collectively, these companies are worth US $3.48 trillion with collective annual earnings of US $183 billion and growing fast (in 2018). Ok, so you get the idea.
If we then look at our WAAAX stocks, the picture looks a little different (still on 2018 numbers here).
- Afterpay doesn't have a P/E ratio as it is not profitable
- Ditto with Xero
- WiseTech is sitting on a P/E ratio of 215, with earnings of $78 million
- Appen comes in with a P/E ratio of 75.17 ,with earnings of $71.3 million
- Altium is at 86.32, with earnings of US $44.87 million (A$63.8 million)
Collectively you would be paying $32.24 billion for $213.2 million of earnings.
Foolish takeaway
On these numbers, I know which acronym I would rather be a part of today. The US tech giants have proved they know how to generate disruptive, significant and sustainable profits, while WAAAX stocks haven't proved a whole lot yet (with 40% of the group yet to turn a profit). In my opinion, case closed.
