Word is spreadimg
”ASX tech stocks are in a bubble, and it’s going to end in tears.Publicly listed Australian tech companies are overvalued by between 30 and 100 percent against US comparables, a crazy & dangerous position to be in with a global economic slowdown on the horizon.I am lucky enough to have a front row seat to private startup valuations in both the US and Australia, as well as having an understanding of the underlying metrics that drive tech stock valuations.Tech companies are generally valued based on a forward multiple of annual recurring revenue (ARR), with the multiples higher or lower based on how fast the company is growing. There are more nuances, of course, but at a high level, growth rate defined ARR multiples are reasonably accurate to value both private and public firms. For example, a company doing $10M ARR with a 10 times ARR multiple has a valuation of $100M.The US is the most mature tech market, with the most market participants (investors and companies). As in all markets, valuations are cyclical (more on that later), but at its core, you should expect Australian tech companies to hold lower multiple ranges than their US counterparts due to our smaller market and higher cost of growth. Additionally, private ARR multiples are almost always higher than their public counterparts.Right now, US markets are around 13 - 25 times ARR (at 100 - 500 percent y/y growth) for private companies, & public companies are around 6 - 13 times ARR (at 30 - 150 percent y/y growth).Australian markets are at 7 - 15 times ARR (at 100 - 500 percent y/y growth) for private companies, and public valuations are at a staggering 7 to 70 times ARR (20 - 250 percent y/y growth).The median 8 year multiple for US public tech is 5.2 times ARR. Right now, the median is about 9 times ARR. This means overall, we are near the peak of a cyclical valuation cycle.US tech companies are also generally better run, funded and have a larger addressable market.Anyone should be able to see clearly that against US comparables & historic norms, ASX listed tech stock valuations are inflated to a point where it’s not unreasonable to call this a bubble - and to understand that any ASX Tech stock with an ARR multiple of 10 or more is probably overvalued.With that said, here’s a rundown of some of the most outrageous ASX tech valuations right now, based on last announced ARR figures and market cap at close on April 3.Bid Energy (BID). $3.7M ARR, $88.09M market cap, a 23 times ARR multiple, growing 106 percent y/y. Probably worth ~$30M net of cash. US startups growing at 500 percent y/y are commanding 13 times ARR valuations; 23 times ARR is what some might call “completely insane”.LiveHire (LVH). $2.05M ARR, $151.26M market cap, a 73 times ARR multiple, growing 110 percent y/y. Silicon Valley investors might pay ~$25M net of cash. This is lunacy. The fact that investors just threw another $15M at LiveHire makes this even harder to swallow.XREF (XF1). $7.6M ARR (new credit sales + usage), $101M market cap, a 13 times ARR multiple, new sales growth is 59 percent y/y. Net of cash, a business like XREF would get valued by the smartest US tech investors at ~$60M.Buddy Technologies (BUD). >$2.6M revenue, 102.27M market cap, a 39 times ARR multiple, growing 92 percent y/y. BUD is a mix of hardware and technology, and just acquired LIFX, a lighting company that did $38.5M non-recurring revenue in 2018, with the combined entities losing >$12M a year in negative EBITDA. Neither an underlying ARR multiple valuation OR a traditional EBITDA/EV valuation stands up as anywhere near close to justifying BUD’s market cap.LiveTiles (LVT) - $22.9M ARR, market cap of $329.79M, 14 times ARR multiple, growing 232 percent y/y. LiveTiles is objectively a great company. The CEO Karl, is fantastic, the product is strong, and they have a great partnership with Microsoft.14 times ARR is too high by far however, considering that’s at the upper range of US private valuations, where growth expectations are 500 percent y/y - LiveTiles should be trading at more like $250M.At the larger end of the scale, TechOne, Adrian DiMarco’s behemoth is doing $299M revenue, but only $169M of that is recurring - market cap of $2.61B, a 15 times ARR multiple, growing at 22 percent y/y. A $2B valuation is perhaps stomachable here.WiseTech is doing $270.81M ARR with a $7.3B market cap, forecasted growth of 53 percent in FY19 - an ARR multiple of 26 times. Justifying a 26 times multiple is impossible, even though WiseTech is generating cash hand over fist. I think it should be trading at $3.5B.As a comparison, Salesforce is doing $13B revenue, with $1.3B EBITDA, and market cap of $122B (all USD) and is growing at 26 percent y/y, with a far larger addressable market than both TechOne and WiseTech - a 9 times ARR multiple. Why do two smaller companies, one of which is growing slower, have far better multiples than Salesforce, maybe the greatest software company of all TIME? Silly.GetSwift (GSW). What a disaster. Trading at less than half its cash assets. Fewer than half the contracts it had been publicising were actually generating any revenue. Along with Guvera, a shining example of how Australian public tech investors are still buying into ludicrously overhyped market announcements.ELMO (ELO). $36.4M ARR, $357.26M market cap. Good but not great growth rate of 65.4 percent y/y - a 9.8 times multiple. Bear in mind that from 1H18 to 1H19, organic ARR growth was only ~41 percent (the rest is via acquisitions).When ELMO runs out of cheap acquisitions, they are going to struggle to keep up the growth numbers. A 9.8 times multiple on a business where <50 percent of revenue growth is from actual new sales growth is unacceptable. Net of cash, ELMO is worth maybe $275M, when you take into account what organic growth and market adoption actually looks like.I could go on and on with more examples, and I encourage readers to do their own spot checks.So - why should you care that many ASX tech companies are overvalued?Firstly, with a global slowdown looming, and equities trading at historical peaks, it is extremely likely that ASX Tech valuations will pull back hard in 2019. By hard, I mean at least 30 percent. Last time tech valuations pulled back from a peak, they pulled back by 50 percent. When that happens, investors get burnt, capital moves to other vehicles & political sentiment turns sour towards the Australian tech sector - when we desperately need to be doing everything we can to shore up our innovation economy.Secondly, Australian tech should be a huge wealth driver for all Australian retail investors.To make that happen, we need our local startups to list on our local exchange.Unless we make a change now, our startups will continue to list on US and asian exchanges, where Aussie retail investors largely miss out. Smart founders and smart investors want to IPO on a stable, mature market with reasonable valuations - not one that rewards misleading market statements and overhyped business models.Our Venture Capitalists (namely Airtree and Blackbird) have done a great job of nurturing the private tech ecosystem. We desperately need a mature, local, public retail market to support tech as it matures from VC funded to publicly securitised.Investors need to punish companies with runaway valuations and correct the market as soon as possible, so that long term, we’re globally competitive in such an important sector, and so all Australians can capture upside from the blood, sweat and capital going into Australia’s tech ecosystem.”
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