Why Australian investors are valuing tech stocks all wrong

Note: This extract was taken from Livewire Live 2024’s panel: The Good, the bad and the Ugly filmed 17 September 2024.

First Sentier’s Dushko Bajic believes the tall poppy syndrome is alive and well in Australia. Our high-quality tech sector is a case in point. He argues that investors love the likes of Nvidia (NASDAQ: NVDA) and end their analysis at the P/E ratio, but there is plenty of opportunity closer to home.

Bajic particularly likes Australian enterprise software companies, nominating names like Pro Medicus (ASX: PME), Xero (ASX: XRO), Altium (recently acquired), Hub24 (ASX: HUB) and Siteminder (ASX: SDR).

“Why is it that we have a pretty strong cohort and we punch above our weight? I think as much as a comparative advantage to Australia in our iron ore industry, we’re extremely low cost, we’ve got a small population, we can export it and make money through the cycle, even when all prices are low,” says Bajic.

He also adds that enterprise software plays into Australia’s burning problem – that of efficient growth in a very high labour-cost economy.

As a cohort, Australian enterprise software companies are sticking to what they are good at – their ‘knitting’ as Bajic points out, and this is perhaps why he has concerns about companies like Woolworths (ASX: WOW) and CSL (ASX: CSL) which have expanded outside their expertise - think Big W and Masters for Woolworths, or Vifor for CSL - and seen financial losses as a result.

Bajic’s top pick of the Aussie tech space is Wisetech (ASX: WTC) and he argues that the valuation isn’t unreasonable for the growth it offers.

“When you can 15x your earnings per share over an eight year period and you’ve got prospects to continue to do that for the decade ahead, that’s essentially what you’re paying for and that PE comes down pretty quickly when you’re generating that amount of cashflow and earnings.”

He has held Wisetech since $6/share but plans to remain so for the long term. He also reminds investors that businesses in their growth phase can trade on high P/Es, sharing Salesforce (NASDAQ: CRM) as a prime example of this.

To hear the full insights on Wisetech and what advice Bajic gave Woolworth’s new CEO, you can watch the full panel here.