How Does The Aussie Tech Sector Stack Up Against Its US Counterparts?
David Bassanese | Nov 28, 2018 16:02
Originally published by BetaShares
The Australian technology sector has enjoyed solid return performance in recent years, so much so that some of the leading companies have been given their own acronym – the so-called “WAAAX” stocks. As this note demonstrates, however, our home grown technology boom appears somewhat frothier than is the case in the United States, where share price performance among the “FAANG” stocks has been even stronger and appears more fundamentally justified.
h2 Australian technology vs. the Nasdaq 100 Index/h2The table below identifies the top companies in the S&P/ASX 200 Information Technology Sector and the US-based NASDAQ-100 Index* respectively. Australia’s so-called “WAAAX” stocks comprise Wisetech (AX:WTC), Afterpay (AX:APT), Altium (AX:ALU), Appen (AX:APX) and Xero (AX:XRO). By contrast, America’s so-called “FAANG” stocks comprise Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL).
As evident, price-to-earnings ratios for the top stocks within the local technology sector are generally higher than that for those in the Nasdaq 100 Index. Note also that while the top 12 stocks (by market capitalisation) constitute the entire S&P/ASX 200 technology sector, the top 12 stocks account for just over half of the Nasdaq 100 Index.
All up, Australia’s tech sector is generally pricier, smaller cap in nature, and less well diversified than is the case with the NASDAQ-100, especially as the latter not only includes tech companies but also those from a range of other sectors such as consumer discretionary and healthcare (see here for more information).
h2 Local tech performance: bubblier than that of the Nasdaq 100/h2As evident in the chart below, the local tech sector has enjoyed good share price performance in recent years, with around 11% p.a. compound price returns from 31-January 2009 to 26-November-2018. By contrast, however, the Nasdaq 100 Index has enjoyed annualised price returns of around 19% p.a. over this period.
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Past performance is not an indicator of future performance. You cannot invest directly in an index.
What’s more, the Nasdaq 100 Index’s price returns have been underpinned by solid growth in forward earnings of 17% p.a. over this period, compared with flat growth in earnings from the Australian tech sector.
Indeed, all of the local tech sector’s price performance since the financial crisis has been driven by rising valuations, with the price-to-forward earnings ratio rising from around 10 in early 2009 to a recent end-month peak of 32.8 in September 2018. The recent global sharemarket sell-off has seen local tech valuations decline to a (still pricey) 26.4 by late November.
By contrast, valuations for companies in the Nasdaq 100 Index have been more stable over this period, with the price-to-forward earnings ratio lifting from around 15 in early 2009 to a recent peak of 21 in January earlier this year.
Compared to the performance of the Nasdaq 100 Index, the performance of the S&P/ASX 200 Technology Sector – especially since early 2016 – has been far frothier.
h2 Nasdaq 100 earnings have been more reliable/h2Of course, it could be that higher local tech valuations are justified by a strong earnings outlook. Indeed, according to Bloomberg consensus estimates, forward earnings for companies in the local tech sector are forecast to grow by a healthy 15.6% over the coming 12 months. But as seen in the chart below, earnings expectations for the local tech sector have been consistently too bullish in recent years – averaging 12% expected annual growth since October 2006, compared with actual annual earnings growth over only 5% over this period.
By contrast, consensus analyst earnings expectations for companies in the NASDAQ-100 Index have on average been closer to reality – actual and expected earnings since October 2006 have both averaged around 15% p.a.
All up, although it is encouraging to see ongoing development of the local technology sector, and although there have no doubt been some outstanding success stories here, in terms of seeking broad technology investment exposure, the fundamentals underpinning America’s tech giants – as encompassed in the Nasdaq 100 Index – still currently appear more attractive. Indeed, the recent stock market sell-off has seen the price-to-forward earnings ratio for the Nasdaq 100 Index drop to around 17.0 by late November, or close to its average since 2009 of 16.6. Since early 2003, the PE ratio has averaged 20.
While further share price weakness over the short-run cannot be ruled out, the strong business models underpinning America’s tech giants still appear sound.
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