Valuations

Technology stocks are often difficult to assess because there is often not a regular shareholder return mechanism, e.g., a dividend, and a lot of future growth assumptions must be made.

Furthermore, on a standalone basis, traditional price-to-earnings multiples may not be particularly useful when a company is growing rapidly.

One useful methodology is to assess the relative value by comparing and contrasting it with a basket of peers.

Helpfully, a large quantity of data is available on US stocks to help us assess Australian tech sector valuations.

Aussie v US comparison

US companies are, on average, much larger, but there are crossovers in markets, strategy, and operations facilitating this comparison.

This analysis considers the latest financials revenue, margins, and realised growth.

Grouping companies by a net operating margin gives a rough like-for-like comparison.

The companies reviewed are shared below:

Country

Net operating margin (NOM) buckets

Ticker

Company name

United States NOM 0-20% NYSE:SHOP (SHOP) Shopify
United States NOM 0-20% NASDAQ:ETSY (ETSY) Etsy
United States NOM 0-20% NASDAQ:NFLX (NFLX) Netflix
United States NOM 0-20% NYSE:CRM (CRM) Salesforce
United States NOM 0-20% NASDAQ:AMZN (AMZN) Amazon
United States NOM 0-20% NYSE:YELP (YELP) Yelp
United States NOM 20%+ NASDAQ:ZM (ZM) Zoom communications
United States NOM 20%+ NASDAQ:META (META) Meta d.b.a Facebook
United States NOM 20%+ NASDAQ:AAPL (AAPL) Apple
United States NOM 20%+ NASDAQ:MSFT (MSFT) Microsoft
Australia NOM 0-20% ASX:CPU (CPU) Computershare
Australia NOM 0-20% ASX:DDR (DDR) Dicker Data
Australia NOM 0-20% ASX:IRE (IRE) Iress
Australia NOM 0-20% ASX:PPH (PPH) Pushpay
Australia NOM 0-20% ASX:OCL (OCL) Objective Corp
Australia NOM 20%+ ASX:WTC (WTC) WiseTech Global Ltd
Australia NOM 20%+ ASX:TNE (TNE) TechnologyOne Ltd
Australia NOM 20%+ ASX:ALU (ALU) Altium
Australia NOM 20%+ ASX:XRO (XRO) Xero

Aussie v US share prices

Australian tech share prices have not fared as poorly as American companies this year, the market still providing the benefit of the doubt to sales pipelines given the later release from COVID lockdown in Australia.

The Aus basket in this comparison is down on average 22% YTD versus 44% for the US companies.

Aussie v US key performance indicators (KPIs)

Market

Net operating margin (NOM) buckets

Year to date change

Price / Revenue

Price earnings

Revenue growth

Price / Revenue growth adj

Price / Earnings growth adj

Director comp. as share of gross profit

US

NOM 0-20%

-52%

4.11

76

29%

0.1

2.4

1.33%

US

NOM 20%+

-36%

6.85

21

36%

0.2

0.7

0.43%

US

US Average

-44%

5.48

49

32%

0.2

1.6

0.88%

AUS

NOM 0-20%

-11%

6.24

49

10%

1.2

9.7

1.97%

AUS

NOM 20%+

-32%

17.41

57

8%

2.3

8.2

1.69%

AUS

Aus Average

-22%

11.82

53

9%

1.7

9.0

1.83%

AUS v US

NOM 0-20%

41%

2.13

-27

-20%

1.1

7.3

0.64%

AUS v US

NOM 20%+

4%

10.57

36

-27%

2.0

7.5

1.26%

AUS v US

AUS v US Average

23%

6.35

5

-23%

1.6

7.4

0.95%

The price to revenue is more attractive for US companies. Given half the fall in valuations YTD, Aus companies are over twice the price for each dollar of revenue brought in.

Price to earnings is closer on average, but this is skewed somewhat by SHOP.

Further to the delayed lockdown in Australia, the growth figures are still not back up to pre-COVID; US companies are growing more quickly on average.

When adjusting the price-earnings and price revenue ratios for revenue growth, it becomes apparent that Australian tech stocks are not as good value as their US peers.

US technology stocks, on average, offer the investor more favourable Price/Revenue, Price/Earnings, and higher growth than their Australian peers.

On average Australian listed tech is paying directors and executives more than twice what US companies are for every dollar of gross profit.

Australian technology is at a competitive disadvantage on the scaled US operations, being forced to pay more for talent and returning a lower net operating margin as a result.

Results are in

The Australian technology sector appears overvalued compared to a basket of US peers.

The most favoured US names from this analysis are META, ZM, ETSY, and AAPL, in that order. They are averaging a PE multiple of 20 on annual growth above 35%.

Special mention to NFLX, which is down 72% YTD and on the growth of 18%, a PE multiple of 15 is attractive.

The favoured Australian names from this analysis are DDR, IRE, and ALU, in that order. With the upper band of growth amongst Australian tech and region-leading earnings multiples, these three names are the best of the bunch compared to the more favourable US opportunities.

Special mention for XRO given solid growth, but as highlighted by the executive remuneration of 3% of gross profit, XRO starts at a competitive disadvantage in a fiercely competitive market with the likes of QuickBooks, NetSuite, and many small-scale solutions looking to take market share.

Additionally, the higher Price/Revenue ratio of over 12 is less favourable than some US names like CRM trading at a multiple of six.

Whether you are waiting on the sidelines with cash or looking to dive headlong into the maelstrom, we’ll leave you with a message from famed technology leader Bill McDermott:

“This is not even close to 2008. In 2008, I was with a company where we lost a billion euros in pipeline in a day. That was a crisis. This is not a crisis,” McDermott said in an interview on “Mad Money.”

“If you don’t change, and you don’t transform your businesses, and you don’t hit the accelerator now when headlines are down, you might not be on any list in 30 years,” he said.