The WAAAX stocks, consisting of Wisetech (ASX: WTC), Appen (ASX: APX), Altium (ASX: ALU), Afterpay (ASX: APT) and Xero (ASX: XRO) are extremely popular stocks with equally extreme valuations. This is best exemplified by Afterpay’s $8 billion valuation despite making a $12 million loss in the 2019 financial year. The total market capitalisation of the WAAAX companies is an eye watering $35 billion and the total earnings of the WAAAX stocks was $161.8 million in FY19 with $108 million received in dividends. Only Wisetech, Appen and Altium are profitable.
The WAAAX stocks are Australia’s equivalent of the FAANG stocks in the US (Facebook, Apple, Amazon, Netflix and Google). Unlike the FAANG stocks, with their large cash reserves and highly profitable and proven business models, the WAAAX stocks are barely profitable, have unproven business models and have valuations which are higher than most FAANG stocks. Why are these stocks so highly valued? It is mainly because they are the only technology companies available on the ASX. While there are some ASX listed technology stocks which are not one of the WAAAX companies, the WAAAX companies account for most of them. So, if an investor wants to invest in an ASX listed technology company their main options are Wisetech, Appen, Afterpay, Altium and Xero. Hence the high prices.
To illustrate just how overvalued they are, let’s imagine I had $35 billion that I wanted to invest. With this $35 billion I could buy all five WAAAX companies in their entirety. Let’s call this Portfolio A. Alternatively, I could buy Portfolio B, consisting of 10 companies which are generally regarded as being high quality. The market value of both portfolios is the same. In Portfolio A, my companies would generate $395 million in EBITDA, $161.8 million in net profit after tax and give me $108 million in dividends. The portfolio has a trailing PE of 216. Yes, 216!
Alternatively, I could buy Portfolio B. This portfolio generates EBITDA of $4.135 billion, net profit after tax of $1.685 billion and I would receive dividends totaling $1.38 billion. The portfolio’s trailing PE is 21. Not overly cheap, but not irrationally expensive either.
In other words, for the same price of buying the WAAAX stocks, I could buy Inghams, Brickworks, Collins Foods, Event Hospitality and Entertainment, Crown Resorts, Invocare, Reece, Orora, Ansell and Boral. And it’s not like these companies are all cheap. Crown Resorts has a PE of 21, Collins Foods has a PE of 27 and Reece has a PE of 30, just to name a few. The total FY19 earnings for these companies totalled $1.685 billion, compared to just $161.8 million for the WAAAX stocks. The PE for the WAAAX companies is a whopping 216 compared to a PE of 21 for the companies in Portfolio B.
No amount of growth can justify the valuations of Wisetech, Appen, Altium, Afterpay and Xero. That’s not to say that the WAAAX companies are poor quality, just that the price does not reflect the risks inherent in these businesses. At the moment the pricing of the WAAAX stocks is about growth at any cost.
If you had $35 billion to spend, which portfolio of companies would you buy? I know which one I would pick. (Idea source for this article.)