Australia's WAAAX shares are the equivalent of the United States FAANG stocks – tech shares trading on high multiples carrying the hopes and dreams of investors. We take a look at recent developments in WAAAX-land to give you our December update.
WAAAX consists of WiseTech Global Ltd (ASX: WTC), Appen Limited (ASX: APX), Afterpay Touch Group Ltd (ASX: APT), Altium Limited (ASX: ALU), and Xero Limited (ASX: XRO).
For most of 2019, these shares have been market darlings, with share prices steadily increasing throughout the year. The past couple of months however have brought mixed results, from regulatory concerns (Afterpay) to earnings upgrades (Appen). Read on for the low down.
WiseTech Global Ltd
WiseTech held its AGM in November where it reported total shareholder returns of 77% in FY19. FY19 revenues were up 57% to $348.3 million, while net profits after tax (NPAT) were up 32.5% to $54.1 million.
During FY19 and in the months since, WiseTech has made 15 acquisitions across Europe, Asia, Australasia, and the United States. The purpose of these acquisitions was to allow access to market positions and technologies that would otherwise be difficult to build. WiseTech has now secured 21 geographic foothold acquisitions spanning 30 countries and reaching 80% of global GDP and 74% of imports.
WiseTech reports that they will continue to execute on smaller, but important, European economies and key remaining markets in Asia. Much of the heavy lifting in terms of geographic acquisitions has, however, been completed.
WiseTech continues to invest heavily in innovation, with more than 32% of FY19 revenues invested in product development. More than 830 product upgrades were rolled out to the CargoWise One platform in FY19, and with each new acquisition a native build of CargoWise One for the relevant country or region is embarked upon.
The company's FY20 guidance of $440–460 million revenue with growth of 26–32% was reiterated. Earnings before interest, tax, depreciation and amortisation (EBITDA) of $145–153 million is expected in FY20, with growth of 34–42%. WiseTech is currently trading at $27.59, up 62% from $17.03 at the start of the year.
Appen Ltd
Appen announced an increase to its 2019 full year earnings guidance on 18 November. Full year underlying EBITDA are now predicted to be $96–99 million, up from previous guidance of $85–90 million.
The improved earnings forecast was driven increases in monthly revenues and margins, largely from existing projects with existing customers. Appen shares soared on the news, leaping more than 13% to $26.43. Appen is currently trading at $24.20, up 90% from $12.80 at the start of the year.
Afterpay Touch Group Ltd
Afterpay has ridden the buy-now, pay-later (BNPL) wave to new highs in 2019. Shares of the BNPL provider were trading above $36 in October before regulatory concerns cast cold water on the price. In the annual report of its Payments System Board, the Reserve Bank of Australia (RBA) announced that next year's review would examine "no-surcharge" rules imposed by BNPL operators.
BNPL operators forbids merchants from passing on the cost of the service to customers. By contrast, debt and credit card providers are cannot legally prevent merchants from adding a surcharge to cover payment costs. According to the RBA, "an issue for the bank is whether policy action in relation to these no-surcharge rules should be considered."
Afterpay faced further bad news last week. An independent review into the company's compliance with anti-money laundering laws concluded Afterpay had committed historic breaches. By not collecting customers' dates of birth in 2015 and 2016, Afterpay was not in compliance with anti-money laundering requirements.
Afterpay's historic non-compliance was attributed to incorrect legal advice, which classified Afterpay's business model as one of providing financing loans to retail merchants rather than loans to facilitate customer purchases. As a result, Afterpay focused anti-money laundering efforts on retailers rather than end customers.
Since November 2016, Afterpay has been collecting the dates of birth of new customers and retrospectively collecting dates of birth from existing customers. More exacting checks to verify the identity of customers have been put in place.
The independent review concluded that Afterpay was at low risk of exploitation by money launderers and terrorist financiers, praising the company for its strong compliance culture. Investors celebrated the findings, sending the share price surging over 7% to $32.64 on 25 November. Currently trading at $30.65, shares in Afterpay are up more than 157% from $12 at the start of the year.
Altium Limited
They say no news is good news, and for Altium this may be true. Altium stayed out of the headlines in November as the share price edged higher, finishing the month up over 11% at $37.07.
Altium provides software for the design of printed circuit boards that are used in most electronic devices. Currently trading at a price-to-earnings ratio of 62 and a dividend yield of 0.92%, Altium has been criticised as expensive, but is growing.
Net profits after tax (NPAT) grew 22% in FY17, 33% in FY18, and 41% in FY19. So not only are profits growing, but they are growing at an accelerating rate. Altium has set a target of $500 million in revenue by 2025, which means exponential growth is to be anticipated – revenue in FY19 was $171.8 million. Altium shares are up 78% from a low of $20.79 at the start of the year.
Xero Limited
Xero delivered its half year earnings in early November. Highlights included a 30% increase in annualised monthly recurring revenue and a 32% increase in operating revenue (up to NZD$338.7 million) compared to the prior corresponding period.
Free cash flow was NZD$4.8 million compared to free cash outflow of $9.8 million in the prior corresponding period. Net profit after tax increased by $29.9 million to $1.3 million. EBITDA excluding impairments of NZD$65.9 million was almost double the NZD$34.5 million achieved in 1H19.
The small business accounting software provider boasts 2 million subscribers and leads the cloud-based accounting software markets in Australia, New Zealand, and the United Kingdom. It took more than a decade to reach Xero's first million subscribers, but just 2.5 years to add the next million, demonstrating the pace of Xero's adoption across key markets. Xero shares are currently trading at $82.36, up 96% from $41.95 at the start of the year.
Foolish takeaway
These tech stocks have been much loved by investors in 2019 and as a result trade on high multiples. For this reason value investors tend to dismiss them as overpriced. Growth investors, on the other hand, look to the potential long term growth story.
