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WAAAX v FAANG: measuring Aussie tech stocks against US rivals

David Bassanese  |  29 Nov 2018Text size  Decrease  Increase  |  
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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 US, where share price performance among the "FAANG" stocks has been even stronger and appears more fundamentally justified.

Australian technology vs. the NASDAQ-100 Index

The 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, Afterpay, Altium, Appen and Xero. By contrast, America’s so-called "FAANG" stocks comprise Facebook, Amazon, Apple, Netflix and Google.

Australian Technology Sector vs. NASDAQ-100 Index: Top 12 Holdings

BetaShares Exhibit 1

Source: Bloomberg 

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).

Local tech performance: bubblier than that of the NASDAQ-100

As evident in the chart below, the local tech sector has enjoyed good share price performance in recent years, with around 11 per cent a year 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 per cent a year over this period.

Price Index

BetaShares Exhibit 2

Source: Bloomberg, BetaShares

What's more, the NASDAQ-100 Index's price returns have been underpinned by solid growth in forward earnings of 17 per cent a year over this period, compared with flat growth in earnings from the Australian tech sector.

Forward Earnings

BetaShares Exhibit 3

Source: Bloomberg, BetaShares

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.

Price-to-Forward Earnings

BetaShares exhibit 4

Source: Bloomberg, BetaShares

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.

NASDAQ-100 earnings have been more reliable

Of 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 per cent 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 per cent expected annual growth since October 2006, compared with actual annual earnings growth over only 5 per cent over this period.

S&P/ASX200 Technology Sector

BetaShares exhibit 5

Source: Bloomberg, BetaShares

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 per cent a year.

NASDAQ-100

BetaShares Exhibit 6

Source: Bloomberg, BetaShares

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.

The BetaShares NASDAQ 100 ETF (ASX: NDQ)

Australian investors seeking exposure to the US-based NASDAQ-100 Index can easily do so on the ASX through the BetaShares NASDAQ-100 ETF (ASX Code: NDQ).

The NDQ ETF provides exposure to the price and income performance of the NASDAQ-100 Index (before fees and expenses) and as such gives Australian investors access to many of the world's most innovative companies including Apple, Facebook, Amazon and Google.

*This article contains graphs showing performance of varied indices. Past performance shown is not an indicator of future performance. The graph showing performance of the index which NDQ aims to track does not take into account ETF fees and expenses. It is not possible to invest directly in an index.

is chief economist at BetaShares.

This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

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