Local investors exposed to US tech titans on multiple fronts
The sell-off in tech titans on Wall Street will be watched very closely by nervous Australian sharemarket investors.
Moreover, a first wave of offshore investors buying tech titans has more recently been followed by an even bigger wave of Australian investors moving into the US markets through exchange-traded funds. The number of Australian funds invested in ETFs have tripled since 2012.
In turn, US-based ETFs are increasingly weighted towards tech stocks. Eight of the top 10 US stocks are now classified as technology companies. This means that Australian investors who have not actively chosen to participate in the US tech sector find themselves exposed to it in any event due to the catch-all nature of ETFs.
Separately, any downward rerating of tech stocks overseas will automatically be reflected in valuations in our own very limited market for tech-related stocks such as Hansen, Seek, TechnologyOne or Webjet.
As Barron’s points out, some tech titans are sporting very high earnings multiples — such as Amazon on a stunning 147 times — but in general the sector is relatively reasonable compared to both historical numbers and other sectors on Wall Street.
Facebook is on 30 times earnings, Google (Alphabet) is on 28 times, Microsoft is on 23 times and Apple is on 15.9 times. In the US, these figures are compared to blue chips such as Procter & Gamble on 22 times or PepsiCo on 23 times — despite the much lower growth prospects offered by US blue chips.
Casting the net wider, if the US tech titans are compared to Australian tech leaders they also come up surprisingly well. Webjet and Microsoft, for example, are on the same price earnings multiple of 23.
More dramatically, Seek is on 34 times, while a US leader such as Apple is on less than half that multiple at 16 times.
In other words, there is some evidence to suggest the prices to be concerned with are in the tech-related stocks on the ASX rather than many of the more high-profile stocks on Wall Street.
Australian investors who have bought US tech titans as individual stocks have done so looking for growth in a slow economic environment and many US analysts believe they will not be disappointed.
Apple and Google, for instance, are both expected to increase sales by at least 12 per cent in the year ahead — a pace unlikely to be matched by major listed stocks in any country.
Even Amazon’s worryingly high price-earnings ratio can at least be explained by the broad enthusiasm for the stock’s capacity to deliver growth for investors and trouble for rivals in the years ahead.
On the ASX, both Coles (through Wesfarmers stock) and Woolworths have been feeling the negative impact of Amazon’s broad support in recent weeks.
Shares in Woolworths fell 3 per cent (with the company suffering a $1 billion hit to its market capitalisation) today as the ASX opened for the first session since Amazon announced its $13bn plan to enter the grocer business by purchasing US-based Whole Foods at the weekend.
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The sudden sell-off in Wall Street’s so-called tech titans will be watched very closely indeed by Australian investors: the fortunes of the American tech sector have become exceptionally important as domestic investors encouraged to diversify their investment offshore have piled into tech stocks.