Australia’s WAAAX Shares Wiped out as Inflation Undermines Prospects for Growth Stocks

Top Australasian tech companies have all seen disastrous performances this year, as breakneck inflation erodes the fortunes of growth stocks.  

The “WAAAX” cohort of listed tech companies have been especially sorely affected, with all of them posting double-digit price declines since the start of 2022.  

These Australian tech companies are all esteemed as leading contenders in their respective fields, and include WiseTech, Afterpay, Appen, Altium and Xero.  

WiseTech is a provider of smart, cloud-based software solutions for the global logistics sector, while fintech company Afterpay is Australia’s leading “buy now pay later” consumer finance platform.  

Appen is a supplier of the data that is instrumental to the development of machine learning and artificial intelligence products, and Altium is a developer of design software for printed circuit boards.  

Xero is a New Zealand-domiciled software-as-a-service platform that is listed on the ASX, and provides cloud-based accounting software to small- and medium-sized enterprises.  

All of these stocks have suffered sharp declines in 2022 – WiseTech is down over 31% year-to-date (YTD), falling 20% in just a month by early May.  

Afterpay is down almost 20% YTD, while Appen is down over 42% since the start of the year, with share prices recently collapsing following the withdrawal of a takeover proposal from Canada’s Telus International, that previously drove them up 30% in Thursday trading.  

Altium stocks have fallen more than 36% YTD, and Xero is down nearly 39% compared to the start of 2022.  

While uncertain economic waters have spelt trouble for equities across the board, these sharp double-digit declines for Australia’s top tech stocks are far in excess of the 5.4% YTD slide in the S&P/ASX 200.  

A key underlying factor in the collapse of share prices for top Australian tech companies lies in the rampant inflation which has emerged in the wake of the COVID-19 pandemic.  

Observers have imputed this inflation to gridlock’d global supply chains, as well as loose monetary policy launched by central banks around the world.  

Inflation is an especially adverse challenge for growth stocks that rely more heavily upon rapid expansion to sustain their share prices.  

This is because high inflation invariably prompts central banks and monetary authorities to raise interest rates, in order to contain unchecked price gains.  

Higher interest rates lead to sharp increases in the cost of borrowing, which is a major negative for fast-growing tech companies that seek to drive rapid expansion via leverage.  

They also undermine the valuations for high-growth companies, which are based on future earnings and free cash flow (FCF) growth. High interest rates tend to drive expectations for earnings and FCF growth downwards. 

In addition to these two factors that are especially negative for growth stocks, higher interest rates can have a broader adverse impact upon equities in general.  

They worsen the economic environment by making the cost of funds more expensive, while they increase yields for bonds and fixed-income assets, making these rivals to equities more appealing to investors.  

In terms of specific performance reports that have contributed to the recent tech stock wipeout in Australia – Xero fell short of profit consensus in its most recent yearly result to March, while Appen’s trading update from Thursday pointed to a decline in year-to-date revenue compared to the same period in 2021. 

Altium’s half-year results were weaker than expected, leading to aggressive selling of shares despite its performance still falling within guidance.  

WiseTech remains an odd outlier in terms of business results, yet has still remained consistent with its peers in terms of dismal share price performance.  

While WiseTech saw profits for the first half of FY22 rise 77%, this has still failed to prevent its share prices from falling over 30% since the start of 2022.