Interview: Your guide to tech stocks after a massive six months

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Sean Aylmer: Welcome to the Fear and Greed daily interview. I’m Sean Aylmer. Globally,

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Sean Aylmer: it’s been a pretty good year so far for the

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Sean Aylmer: tech stocks. The likes of Apple and Microsoft have done

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Sean Aylmer: really well. While Nvidia has ridden the AI boom to

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Sean Aylmer: become a trillion- dollar company. But what’s it all mean for

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Sean Aylmer: the local tech sector? Remember, this is general information only

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Sean Aylmer: and you should speak to a professional advisor before making

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Sean Aylmer: investment decisions. Elise Kennedy is Head of Technology Research and

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Sean Aylmer: Director of Equity Research at Jarden. Elise, welcome back to

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Sean Aylmer: Fear and Greed.

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Elise Kennedy: Thanks for having me again.

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Sean Aylmer: Okay. What’s going on in the tech sector? I don’t

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Sean Aylmer: know that it’s totally rational at times, at least. We’ve

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Sean Aylmer: had quite the run this year, notwithstanding a few bumps

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Sean Aylmer: and bruises.

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Elise Kennedy: Absolutely. I think that the market volatility isn’t necessarily based

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Elise Kennedy: on fundamentals, but we rolled it down and now we’re

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Elise Kennedy: riding it up and who knows over the next couple

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Elise Kennedy: of months as we see rates around the world move

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Elise Kennedy: and inflation try to normalise. I think that’s where we

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Elise Kennedy: get ebbs and flows. But as I’ve said straight from

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Elise Kennedy: all the conversations we’ve had, finding those businesses in between

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Elise Kennedy: there that are going to continue to see and sustain growth.

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Elise Kennedy: There might be some ups and downs and better entry points,

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Elise Kennedy: but fundamentally those are the ones that are going to

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Elise Kennedy: turn out to be the better long- term holds.

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Sean Aylmer: I want to get to the Australian market in a

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Sean Aylmer: moment, but I just want to get your view on

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Sean Aylmer: a few companies. Nvidia being the obvious one, it makes

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Sean Aylmer: computer chips for artificial intelligence. I mean it’s kind of

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Sean Aylmer: high end computer chips. Is it a bubble or does

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Sean Aylmer: it actually have the fundamentals to be… I mean it’s up

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Sean Aylmer: going to 150% or something so far this year.

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Elise Kennedy: I think AI as thematic is a really important one.

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Elise Kennedy: It’s not new. We could’ve turned back a few months

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Elise Kennedy: or years ago and it was very early stage when

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Elise Kennedy: some of the bigger tech guys started to invest in

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Elise Kennedy: it started to pop up in all presentations. But yes,

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Elise Kennedy: there is an element of exuberance that exists within that,

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Elise Kennedy: in any type cycle. Something that I referred a few

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Elise Kennedy: clients to recently was the Gartner Hype Cycle. So if

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Elise Kennedy: you go and look that up, you’ll see there’s this

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Elise Kennedy: irrational exuberance that comes through into the market and everyone

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Elise Kennedy: gets excited. It then drops down, normalizes. It’s still higher

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Elise Kennedy: than where it was before it starts to take more

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Elise Kennedy: of a normalized turn. So I’d be inclined to think

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Elise Kennedy: that that may be what we’re seeing at this point

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Elise Kennedy: in time. So definitely relevant. But yeah, it’s had a

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Elise Kennedy: bit of a good run, hasn’t it?

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Sean Aylmer: It sure has. How does Wall Street stocks like Nvidia,

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Sean Aylmer: but you can add Microsoft, Apple, Tesla, Alphabet into the that

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Sean Aylmer: as well. How important are they to what happens in

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Sean Aylmer: the local market?

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Elise Kennedy: I think that overall they have a sway in the

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Elise Kennedy: local market in terms of if that tech sector is

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Elise Kennedy: a rally, you tend to see a lot of our

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Elise Kennedy: global tech names take a lift in valuation. Is that

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Elise Kennedy: a justified rationale? It’s kind of how markets work. It’s

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Elise Kennedy: like if you see the NASDAQ rally your electronic trading

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Elise Kennedy: and you’re some of those other more less fundamental orientated guys

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Elise Kennedy: will start buying other indices globally and that will drive

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Elise Kennedy: it higher. So I think that comes into play to

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Elise Kennedy: some element, but then also they’ll impact some of the

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Elise Kennedy: guys in the domestic market because some guys might be

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Elise Kennedy: leveraged to that, might be utilising their technology. So there’s

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Elise Kennedy: a few ways that it does flow through.

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Sean Aylmer: Okay. So let’s talk about some of the local companies.

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Sean Aylmer: We have to start with WiseTech Global has been a

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Sean Aylmer: great performer this year up more than 50% notwithstanding a

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Sean Aylmer: bit of a fall late last week. Where’s that one

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Sean Aylmer: sit? Why is that one doing so well and where

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Sean Aylmer: do you think it’s going?

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Elise Kennedy: Yeah, look, the valuation is always a challenge on this name.

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Elise Kennedy: Right now it’s trading on a multiple that is so

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Elise Kennedy: ridiculously high versus some of its peers. An EBITDA of 72.

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Elise Kennedy: Even Xero, which everyone else says is expensive at 60

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Elise Kennedy: times versus some of its peers will be around 30.

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Sean Aylmer: And so I’m just going to jump in. So just explain that.

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Sean Aylmer: So when you’re talking about trading on a multiple, it’s

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Sean Aylmer: actually a multiple of earnings.

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Elise Kennedy: That’s right. A multiple of earnings. So that’s just saying

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Elise Kennedy: what are you paying for today in 12 months time?

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Elise Kennedy: Because if the stock is going to be growing exceptionally

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Elise Kennedy: high, you can justify and grow into that, but it’s

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Elise Kennedy: a matter of you’re putting what it’s value is over

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Elise Kennedy: its earnings.

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Sean Aylmer: And then to give some context around that. So you’re

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Sean Aylmer: saying 72 times earnings, WiseTech Global. A bank would be

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Sean Aylmer: like 12 to 15 times this I guess?

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Elise Kennedy: That’s exactly right. A bank or anything that pays more

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Elise Kennedy: of a earnings based number, which to me I think

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Elise Kennedy: is an increasingly important factor for investors as cash isn’t

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Elise Kennedy: coming free anymore in this environment.

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Sean Aylmer: Okay, so 72 times. Very expensive to get into WiseTech.

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Elise Kennedy: Yeah, that’s right. So it has had a very expensive

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Elise Kennedy: run and I think there’s some risks looking forward. Freight

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Elise Kennedy: volumes are falling, there’s risks to margins. You may look

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Elise Kennedy: back at some of the acquisitions that they did back

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Elise Kennedy: in FY19 and N20. They impacted margins and saw them fall

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Elise Kennedy: by 550 basis points. But whereas you look at where

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Elise Kennedy: consensus in the market kind of has those forecasts for

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Elise Kennedy: WiseTech’s margins and they’ve got no impact from the acquisitions

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Elise Kennedy: that they made. And those two acquisitions were the biggest

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Elise Kennedy: that they’ve ever done. Much bigger than those back in

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Elise Kennedy: 19 and 20. So I think there’s some cause of concern long

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Elise Kennedy: term. Sure this is a great stock, generates a lot

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Elise Kennedy: of free cash flow, got the benefit of global contracts,

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Elise Kennedy: but I think it’s become increasingly pricey.

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Sean Aylmer: Okay. Xero, you mentioned as well, you said 60 times.

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Sean Aylmer: I didn’t realise that was as expensive as that is.

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Elise Kennedy: Look, it is more expensive, but I’m probably more positive on that name.

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Elise Kennedy: We just recently published a report around looking at what

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Elise Kennedy: they can do compared to some of their peers on margins.

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Elise Kennedy: We compared it to MYOB, which is a name that comes

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Elise Kennedy: and goes from the market regularly, and they used to

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Elise Kennedy: achieve EBITDA margins or free cashflow margins of around 40%.

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Elise Kennedy: And Xero right now is doing 3% free cashflow margins.

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Elise Kennedy: So that just to me is our floor as to where

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Elise Kennedy: the potential long- term earnings growth of the business can

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Elise Kennedy: get to. And if I look at MYOB, they were

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Elise Kennedy: doing desktop, they were doing enterprise, different segments that require

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Elise Kennedy: additional investment that I wouldn’t be inclined to think that that would

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Elise Kennedy: be able to get higher for Xero who’s a 100%

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Elise Kennedy: pure play SaaS (Software as a Service). And the new incoming CEO is really

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Elise Kennedy: stripping that business back to its core of accounting. That

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Elise Kennedy: to me, whilst it looks expensive on that 12 month

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Elise Kennedy: basis as I mentioned, I think it’s more likely to

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Elise Kennedy: grow into its earnings and have a few of those

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Elise Kennedy: trigger points to be able to get to a better

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Elise Kennedy: valuation to bring down that or increased earnings that it’ll

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Elise Kennedy: bring down that multiple that I mentioned.

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Sean Aylmer: Stay with me Elise, we’ll be back in a minute.

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Sean Aylmer: My guest today is Elise Kennedy, Head of Technology Research

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Sean Aylmer: and Director of Equity Research at Jarden. Okay. What about the

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Sean Aylmer: online property groups? REA and Domain being the main two.

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Sean Aylmer: We are seeing the property market turning or in some

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Sean Aylmer: cities it has turned definitely. What’s the outlook for those guys?

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Elise Kennedy: You are right. Look, house prices have held up relatively well,

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Elise Kennedy: but listings, volumes is still at record level. But these

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Elise Kennedy: share prices for Domain and REA have already largely priced

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Elise Kennedy: in a lot of that potential uplift in listings volumes.

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Elise Kennedy: Now we also did research lately and looking at just

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Elise Kennedy: warehouse prices have grown and you know, what is REA

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Elise Kennedy: putting through in terms of the price increases for them?

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Elise Kennedy: Because they put through double- digit price increases for the listings.

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Elise Kennedy: So that impacts you and I. When we go to

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Elise Kennedy: our vendor and we go and we say, ” What’s going

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Elise Kennedy: to be marketing spend for this campaign?” They’re going to

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Elise Kennedy: say it’s X. They’re put through a minimum of 10% increase,

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Elise Kennedy: sometimes up to double- digit, high double- digit growth on that.

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Elise Kennedy: Whereas if house prices are growing 5%, it’s grown that

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Elise Kennedy: over the last 10 to 20 years every year on

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Elise Kennedy: a CAGR (Compound Annual Growth Rate) a basis and then REA’s is going to try

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Elise Kennedy: and keep doing 10% price increases. That means that as

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Elise Kennedy: a percentage, it’s going to be $ 5, 000 more in

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Elise Kennedy: say five, 10 years time. I don’t know how much

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Elise Kennedy: our budgets will be able to sustain that. Yeah. So

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Elise Kennedy: whether they have to intermediate the real estate agent to

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Elise Kennedy: be able to take a cut of their commission, which

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Elise Kennedy: I think is going to create conflict. I just think it’s

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Elise Kennedy: going to be a harder slog given how high expectations

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Elise Kennedy: are for these two names at the moment.

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Sean Aylmer: Okay. I also wanted just ask you about the Buy

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Sean Aylmer: Now Pay Later sector because it was an incredible sector

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Sean Aylmer: for a few years. Obviously Afterpay led the way there.

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Sean Aylmer: That’s now been sold to Block. We still have companies

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Sean Aylmer: like ZIP and Sezzle listed on the ASX, but with

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Sean Aylmer: regulation coming, are they companies that we should be thinking about?

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Elise Kennedy: I think they’re really challenged, even though valuation is where

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Elise Kennedy: it is, we find it hard to be able to

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Elise Kennedy: push either of the names. I think they’re doing great

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Elise Kennedy: as with what they have. Management pulling as many leave as they

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Elise Kennedy: can on the cost out, but you’ve got risk on

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Elise Kennedy: the credit side. Sezzle’s just did a recent print that

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Elise Kennedy: showed still very good cost out and delivering on target

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Elise Kennedy: there, but those credit numbers over in the US started

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Elise Kennedy: to tick up. So I think that’s kind of a

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Elise Kennedy: bit of a playbook. If we do get a softer

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Elise Kennedy: economic backdrop, even from here, it’s just ones that are harder

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Elise Kennedy: for me to go and put my hand on the

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Elise Kennedy: table and say, ” Yep, let’s go get these ones,” versus

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Elise Kennedy: some of the others that have some fundamentals backing them.

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Sean Aylmer: And then I have to just quickly ask about SEEK and car

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Sean Aylmer: sales. We’re running out of time, but again, sort of

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Sean Aylmer: traditional tech companies in a way, a bit like REA and

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Sean Aylmer: Domain, SEEK and car sales. What are their prospects?

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Elise Kennedy: Yeah, look, I think car sales is going to have

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Elise Kennedy: an upgrade into the result. Just the used car market

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Elise Kennedy: and the new car market is holding up well in

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Elise Kennedy: Australia, that’s benefiting them. SEEK, I am surprised at the

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Elise Kennedy: jobs market how well that has held up. We are still

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Elise Kennedy: seeing vacancies relatively lower. We still get to see the

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Elise Kennedy: impact of migration, but I think that everyone’s thinking, ” This

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Elise Kennedy: is the last upgrade, this is the last upgrade.” So

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Elise Kennedy: it’s probably not getting as much of the benefit and

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Elise Kennedy: versus aren’t going to buy that as much as they

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Elise Kennedy: are going to for car sales.

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Sean Aylmer: It seems to me companies like SEEK, REA, Domain, car

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Sean Aylmer: sales, they’re very traditional companies. I mean they’re tech companies,

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Sean Aylmer: but they’re based on very traditional industries and cyclical industries.

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Sean Aylmer: Whereas things like, I mean WiseTech Global I suppose is the example,

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Sean Aylmer: much more innovative or something or other. Is it fair

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Sean Aylmer: to say that? Therefore it trades much higher?

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Elise Kennedy: Absolutely. I have to agree. And that’s where technology, because we’re still so early

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Elise Kennedy: a phase in most of the adoption curves, that’s where

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Elise Kennedy: the valuation is for us justified to be higher on

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Elise Kennedy: those multiples, which we discussed earlier versus some others that,

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Elise Kennedy: you compared it to a bank that really doesn’t have

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Elise Kennedy: as much growth or as much lead as is leveraged

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Elise Kennedy: to other macroeconomic forces. Versus, hey, we actually need to

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Elise Kennedy: drive adoption of say, Xero’s accounting software or logistics software

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Elise Kennedy: when it comes to WiseTech. And that to me is

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Elise Kennedy: really why there’s a bit of volatility when it comes

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Elise Kennedy: to markets in the short term, but longer term, if

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Elise Kennedy: you believe in the technology which they’re bringing in, the

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Elise Kennedy: economic mold and the competitive landscape which they’ve created, these

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Elise Kennedy: companies will generate more dollars in the future versus the

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Elise Kennedy: others that might go up and down.

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Sean Aylmer: Elise, thank you for talking to Fear and Greed.

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Elise Kennedy: Thank you as always for having me.

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Sean Aylmer: That was Elise Kennedy, head of technology research and director

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Sean Aylmer: of Equity research at Jarden. This is the Fear and Greed

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Sean Aylmer: every morning for the full episode of Fear and Greed.

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Sean Aylmer: Australia’s most popular business podcast. I’m Sean Aylmer. Enjoy your day.