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The sky-high figures might sound like a distant dream for some investors, but those who backed the Australian tech sector in recent years have made spectacular returns.
They’re not household names like American tech titans Facebook, Google and Apple, but investors in the Australian equivalents, nicknamed the WAAAX stocks, have enjoyed a hugely profitable couple of years.
Software providers WiseTech, Altium and Xero are up around 300 per cent, 400 per cent and 280 per cent respectively over the last two years, while buy-now-pay-later company AfterPay rose almost 700 per cent.
It was machine learning company Appen however that has led the pack, rocketing up around 1,200 per cent over the same period.
“It’s probably the number one Australian performing stock,” Australian fund manager Technical Investing’s director Craig Scheef told Trading Day.
“Had you invested $10,000 there [in 2011], it would have become $4 million,” he added.
While it’s not easy to identify which emerging companies will outperform, these meteoric rises highlight the potential opportunities at home.
So how can you spot an emerging Australian company in any sector?
1. Managing expectations
One of the first things investors should look out at, according to Scheef, is exactly who is at the wheel and what their track record suggests
“Like any company, it’s really all about the management, about identifying that management has the right skill set to deliver,” Scheef said.
“It’s the ones that have history and that’s often difficult in emerging companies that we haven’t seen before so it’s about [them] building up some trust and credibility,” he explained.
“It’s really about those companies setting expectations and then overdelivering on them.”
Good leaders thus should be able to change direction if and when necessary.
“Netflix, when it first started, was a distributor of DVDs and they had to pivot and change to become the streaming service they are now.”
2. In good company
In lieu of management having a lengthy history, it can help to look at the company they keep.
“If you’re getting global partners that come in and join them with their technology, that is a proof point. We’re looking for continual proof points to validate the company has longevity [and] that it can survive other markets,” Scheef said.
3. Ask questions
Where there lies an opportunity for high-growth, there also likely exists plenty of companies ready to compete for it.
“What we’re really looking for is trying to identify, what is their differentiation? What makes them different from their competitors? What gives them an edge in the market they’re operating in?” Scheef explained.
“If they can’t articulate it to people then you really question whether the company itself knows how to grow.”
4. The right ingredients
Crucial, of course, is also what product a company can offer and what it can do with it.
“What we like to look for, particularly in the technology space, is companies that are developing their own intellectual property (IP),” Scheef said.
“We generally won’t invest in social media and app companies. They’re generally fickle industries and easy to replicate,” he added.
“That IP then needs to be highly scalable, particularly on an international basis, and with very high gross profit margins and operating margins.”
5. Timing is everything
Once you’ve identified a company with promise, it’s time to decide when to jump in based on risk and reward.
“You can invest quite early at a low price and hence the reward may be much higher,” Scheef said. “If a company has a good tailwind behind it…and the sector it’s in is growing quickly, then you can invest earlier.”
“That is versus waiting for more proof points along the way where the valuation may be at a higher point. You may give up some of that upside but there’s more certainty,” he explained.
6. Know when to hold or fold
While the returns from the WAAAX stocks in the last two years are significant, they were not overnight successes.
Altium, for example, floated on the ASX in 1999, with its stock stuck in the doldrums for the next 16 years.
“It does take time [but] once that trend starts and once that trend is established, the momentum can continue,” Scheef explained.
However, many more companies folded in the same time period, while others may simply never turn a profit.
“There’s obviously a lot of companies that fail to deliver and if that is the case then you do have to make that decision to exit.”
Watch the full interview for more and which Australian companies Scheef is watching.