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Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. Globally,

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Sean Aylmer: it's been a pretty good year so far for the

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Sean Aylmer: tech stocks. The likes of Apple and Microsoft have done

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Sean Aylmer: really well. While Nvidia has ridden the AI boom to

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Sean Aylmer: become a trillion- dollar company. But what's it all mean for

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Sean Aylmer: the local tech sector? Remember, this is general information only

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Sean Aylmer: and you should speak to a professional advisor before making

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Sean Aylmer: investment decisions. Elise Kennedy is Head of Technology Research and

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Sean Aylmer: Director of Equity Research at Jarden. Elise, welcome back to

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Sean Aylmer: Fear and Greed.

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Elise Kennedy: Thanks  for  having  me  again.

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Sean Aylmer: Okay.  What's  going  on  in  the  tech  sector?  I  don't 

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Sean Aylmer: know  that  it's  totally  rational  at  times,  at  least.  We've 

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Sean Aylmer: had  quite  the  run  this  year,  notwithstanding  a  few  bumps 

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Sean Aylmer: and  bruises.

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Elise Kennedy: Absolutely. I think that the market volatility isn't necessarily based

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Elise Kennedy: on fundamentals, but we rolled it down and now we're

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Elise Kennedy: riding it up and who knows over the next couple

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Elise Kennedy: of months as we see rates around the world move

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Elise Kennedy: and inflation try to normalise. I think that's where we

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Elise Kennedy: get ebbs and flows. But as I've said straight from

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Elise Kennedy: all the conversations we've had, finding those businesses in between

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Elise Kennedy: there that are going to continue to see and sustain growth.

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Elise Kennedy: There might be some ups and downs and better entry points,

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Elise Kennedy: but fundamentally those are the ones that are going to

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Elise Kennedy: turn out to be the better long- term holds.

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Sean Aylmer: I  want  to  get  to  the  Australian  market  in  a 

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Sean Aylmer: moment,  but  I  just  want  to  get  your  view  on 

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Sean Aylmer: a  few  companies.  Nvidia  being  the  obvious  one,  it  makes 

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Sean Aylmer: computer  chips  for  artificial  intelligence.  I  mean  it's  kind  of 

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Sean Aylmer: high  end  computer  chips.  Is  it  a  bubble  or  does 

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Sean Aylmer: it  actually  have  the  fundamentals  to  be...  I  mean  it's up 

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Sean Aylmer: going  to  150%  or  something  so  far  this  year.

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Elise Kennedy: I  think  AI  as  thematic  is  a  really  important  one. 

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Elise Kennedy: It's  not  new.  We  could've  turned  back  a  few  months 

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Elise Kennedy: or  years  ago  and  it  was  very  early  stage  when 

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Elise Kennedy: some  of  the  bigger  tech  guys  started  to  invest  in 

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Elise Kennedy: it  started  to  pop  up  in  all  presentations.  But  yes, 

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Elise Kennedy: there  is  an  element  of  exuberance  that  exists  within  that, 

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Elise Kennedy: in  any  type  cycle.  Something  that  I  referred  a  few 

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Elise Kennedy: clients  to  recently  was  the  Gartner  Hype  Cycle.  So  if 

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Elise Kennedy: you  go  and  look  that  up,  you'll  see  there's  this 

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Elise Kennedy: irrational  exuberance  that  comes  through  into  the  market  and  everyone 

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Elise Kennedy: gets  excited.  It  then  drops  down,  normalizes.  It's  still  higher 

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Elise Kennedy: than  where  it  was  before  it  starts  to  take  more 

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Elise Kennedy: of  a  normalized  turn.  So  I'd  be  inclined  to  think 

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Elise Kennedy: that  that  may  be  what  we're  seeing  at  this  point 

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Elise Kennedy: in  time.  So  definitely  relevant.  But  yeah,  it's  had  a 

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Elise Kennedy: bit  of  a  good  run,  hasn't  it?

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Sean Aylmer: It  sure  has.  How  does  Wall  Street  stocks  like  Nvidia, 

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Sean Aylmer: but  you  can  add  Microsoft,  Apple,  Tesla,  Alphabet  into the  that 

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Sean Aylmer: as  well.  How  important  are  they  to  what  happens  in 

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Sean Aylmer: the  local  market?

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Elise Kennedy: I think that overall they have a sway in the

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Elise Kennedy: local market in terms of if that tech sector is

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Elise Kennedy: a rally, you tend to see a lot of our

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Elise Kennedy: global tech names take a lift in valuation. Is that

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Elise Kennedy: a justified rationale? It's kind of how markets work. It's

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Elise Kennedy: like if you see the NASDAQ rally your electronic trading

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Elise Kennedy: and you're some of those other more less fundamental orientated guys

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Elise Kennedy: will start buying other indices globally and that will drive

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Elise Kennedy: it higher. So I think that comes into play to

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Elise Kennedy: some element, but then also they'll impact some of the

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Elise Kennedy: guys in the domestic market because some guys might be

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Elise Kennedy: leveraged to that, might be utilising their technology. So there's

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Elise Kennedy: a few ways that it does flow through.

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Sean Aylmer: Okay.  So  let's  talk  about  some  of  the  local  companies. 

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Sean Aylmer: We  have  to  start  with  WiseTech  Global  has  been  a 

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Sean Aylmer: great  performer  this  year  up  more  than  50%  notwithstanding  a 

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Sean Aylmer: bit  of  a  fall  late  last  week.  Where's  that  one 

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Sean Aylmer: sit?  Why  is  that  one  doing  so  well  and  where 

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Sean Aylmer: do  you  think  it's  going?

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Elise Kennedy: Yeah, look, the valuation is always a challenge on this name.

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Elise Kennedy: Right now it's trading on a multiple that is so

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Elise Kennedy: ridiculously high versus some of its peers. An EBITDA of 72.

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Elise Kennedy: Even Xero, which everyone else says is expensive at 60

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Elise Kennedy: times versus some of its peers will be around 30.

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Sean Aylmer: And so I'm  just  going  to  jump  in.  So  just  explain  that. 

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Sean Aylmer: So  when  you're  talking  about  trading  on  a  multiple,  it's 

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Sean Aylmer: actually  a  multiple  of  earnings.

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Elise Kennedy: That's  right.  A  multiple  of  earnings.  So  that's  just  saying 

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Elise Kennedy: what  are  you  paying  for  today  in  12  months  time? 

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Elise Kennedy: Because  if  the  stock  is  going  to  be  growing  exceptionally 

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Elise Kennedy: high,  you  can  justify  and  grow  into  that,  but  it's 

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Elise Kennedy: a  matter  of  you're  putting  what  it's  value  is  over 

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Elise Kennedy: its  earnings.

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Sean Aylmer: And  then  to  give  some  context  around  that.  So  you're 

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Sean Aylmer: saying  72  times  earnings,  WiseTech  Global.  A  bank  would  be 

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Sean Aylmer: like  12 to 15  times  this  I  guess?

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Elise Kennedy: That's  exactly  right.  A  bank  or  anything  that  pays  more 

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Elise Kennedy: of  a  earnings  based  number,  which  to  me  I  think 

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Elise Kennedy: is  an  increasingly  important  factor  for  investors  as  cash  isn't 

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Elise Kennedy: coming  free  anymore  in  this  environment.

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Sean Aylmer: Okay,  so  72  times.  Very  expensive  to  get  into  WiseTech.

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Elise Kennedy: Yeah,  that's  right.  So  it  has  had  a  very  expensive 

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Elise Kennedy: run  and  I  think  there's  some  risks  looking  forward.  Freight 

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Elise Kennedy: volumes  are  falling,  there's  risks  to  margins.  You  may  look 

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Elise Kennedy: back  at  some  of  the  acquisitions  that  they  did  back 

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Elise Kennedy: in  FY19 and  N20.  They  impacted  margins  and  saw  them  fall 

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Elise Kennedy: by  550  basis  points.  But  whereas  you  look  at  where 

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Elise Kennedy: consensus  in  the  market  kind  of  has  those  forecasts  for 

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Elise Kennedy: WiseTech's  margins  and  they've  got  no  impact  from  the  acquisitions 

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Elise Kennedy: that  they  made.  And  those  two  acquisitions  were  the  biggest 

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Elise Kennedy: that  they've  ever  done.  Much  bigger  than  those  back  in 

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Elise Kennedy: 19 and 20.  So  I  think  there's  some  cause  of  concern  long 

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Elise Kennedy: term.  Sure  this  is  a  great  stock,  generates  a  lot 

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Elise Kennedy: of  free  cash  flow,  got  the  benefit  of  global  contracts, 

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Elise Kennedy: but  I  think  it's  become  increasingly  pricey.

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Sean Aylmer: Okay. Xero, you mentioned as well, you said 60 times.

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Sean Aylmer: I didn't realise that was as expensive as that is.

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Elise Kennedy: Look, it is more expensive, but I'm probably more positive on that name.

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Elise Kennedy: We just recently published a report around looking at what

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Elise Kennedy: they can do compared to some of their peers on margins.

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Elise Kennedy: We compared it to MYOB, which is a name that comes

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Elise Kennedy: and goes from the market regularly, and they used to

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Elise Kennedy: achieve EBITDA margins or free cashflow margins of around 40%.

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Elise Kennedy: And Xero right now is doing 3% free cashflow margins.

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Elise Kennedy: So that just to me is our floor as to where

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Elise Kennedy: the potential long- term earnings growth of the business can

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Elise Kennedy: get to. And if I look at MYOB, they were

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Elise Kennedy: doing desktop, they were doing enterprise, different segments that require

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Elise Kennedy: additional investment that I wouldn't be inclined to think that that would

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Elise Kennedy: be able to get higher for Xero who's a 100%

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Elise Kennedy: pure play SaaS (Software as a Service). And the new incoming CEO is really

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Elise Kennedy: stripping that business back to its core of accounting. That

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Elise Kennedy: to me, whilst it looks expensive on that 12 month

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Elise Kennedy: basis as I mentioned, I think it's more likely to

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Elise Kennedy: grow into its earnings and have a few of those

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Elise Kennedy: trigger points to be able to get to a better

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Elise Kennedy: valuation to bring down that or increased earnings that it'll

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Elise Kennedy: bring down that multiple that I mentioned.

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Sean Aylmer: Stay  with  me  Elise,  we'll  be  back  in  a  minute.


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Sean Aylmer: My guest today is Elise Kennedy, Head of Technology Research

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Sean Aylmer: and Director of Equity Research at Jarden. Okay. What about the

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Sean Aylmer: online property groups? REA and Domain being the main two.

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Sean Aylmer: We are seeing the property market turning or in some

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Sean Aylmer: cities it has turned definitely. What's the outlook for those guys?

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Elise Kennedy: You are right. Look, house prices have held up relatively well,

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Elise Kennedy: but listings, volumes is still at record level. But these

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Elise Kennedy: share prices for Domain and REA have already largely priced

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Elise Kennedy: in a lot of that potential uplift in listings volumes.

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Elise Kennedy: Now we also did research lately and looking at just

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Elise Kennedy: warehouse prices have grown and you know, what is REA

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Elise Kennedy: putting through in terms of the price increases for them?

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Elise Kennedy: Because they put through double- digit price increases for the listings.

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Elise Kennedy: So that impacts you and I. When we go to

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Elise Kennedy: our vendor and we go and we say, " What's going

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Elise Kennedy: to be marketing spend for this campaign?" They're going to

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Elise Kennedy: say it's X. They're put through a minimum of 10% increase,

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Elise Kennedy: sometimes up to double- digit, high double- digit growth on that.

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Elise Kennedy: Whereas if house prices are growing 5%, it's grown that

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Elise Kennedy: over the last 10 to 20 years every year on

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Elise Kennedy: a CAGR (Compound Annual Growth Rate) a basis and then REA's is going to try

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Elise Kennedy: and keep doing 10% price increases. That means that as

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Elise Kennedy: a percentage, it's going to be $ 5, 000 more in

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Elise Kennedy: say five, 10 years time. I don't know how much

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Elise Kennedy: our budgets will be able to sustain that. Yeah. So

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Elise Kennedy: whether they have to intermediate the real estate agent to

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Elise Kennedy: be able to take a cut of their commission, which

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Elise Kennedy: I think is going to create conflict. I just think it's

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Elise Kennedy: going to be a harder slog given how high expectations

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Elise Kennedy: are for these two names at the moment.

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Sean Aylmer: Okay.  I  also  wanted  just  ask  you  about  the  Buy 

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Sean Aylmer: Now  Pay  Later  sector  because  it  was  an  incredible  sector 

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Sean Aylmer: for  a  few  years.  Obviously  Afterpay  led  the  way  there. 

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Sean Aylmer: That's  now  been  sold  to  Block.  We  still  have  companies 

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Sean Aylmer: like  ZIP  and  Sezzle  listed  on  the  ASX,  but  with 

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Sean Aylmer: regulation  coming,  are  they  companies  that  we  should  be  thinking  about?

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Elise Kennedy: I  think  they're  really  challenged,  even  though  valuation  is  where 

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Elise Kennedy: it  is,  we  find  it  hard  to  be  able  to 

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Elise Kennedy: push  either  of  the  names.  I  think  they're  doing  great 

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Elise Kennedy: as with what  they  have.  Management  pulling  as  many  leave  as  they 

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Elise Kennedy: can  on  the  cost  out,  but  you've  got  risk  on 

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Elise Kennedy: the  credit  side.  Sezzle's  just  did  a  recent  print  that 

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Elise Kennedy: showed  still  very  good  cost  out  and  delivering  on  target 

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Elise Kennedy: there,  but  those  credit  numbers  over  in  the  US  started 

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Elise Kennedy: to  tick  up.  So  I  think  that's  kind  of  a 

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Elise Kennedy: bit  of  a  playbook.  If  we  do  get  a  softer 

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Elise Kennedy: economic  backdrop,  even  from  here,  it's  just  ones  that are  harder 

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Elise Kennedy: for  me  to  go  and  put  my  hand  on  the 

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Elise Kennedy: table  and  say, " Yep,  let's  go  get  these  ones,"  versus 

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Elise Kennedy: some of the  others  that  have  some  fundamentals  backing  them.

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Sean Aylmer: And then I  have  to  just  quickly  ask  about  SEEK  and  car 

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Sean Aylmer: sales.  We're  running  out  of  time,  but  again,  sort  of 

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Sean Aylmer: traditional  tech  companies  in  a  way,  a  bit  like REA  and 

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Sean Aylmer: Domain,  SEEK  and  car sales.  What  are  their  prospects?

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Elise Kennedy: Yeah,  look,  I  think  car  sales  is  going  to  have 

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Elise Kennedy: an  upgrade  into  the  result.  Just  the  used  car  market 

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Elise Kennedy: and  the  new  car  market  is  holding  up  well  in 

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Elise Kennedy: Australia,  that's  benefiting  them.  SEEK,  I  am  surprised  at  the 

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Elise Kennedy: jobs  market  how  well  that  has  held  up.  We are  still 

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Elise Kennedy: seeing  vacancies  relatively  lower.  We  still  get  to  see  the 

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Elise Kennedy: impact  of  migration,  but  I  think  that  everyone's  thinking, " This 

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Elise Kennedy: is  the  last  upgrade,  this  is  the  last  upgrade."  So 

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Elise Kennedy: it's  probably  not  getting  as  much  of  the  benefit  and 

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Elise Kennedy: versus  aren't  going  to  buy  that  as  much  as  they 

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Elise Kennedy: are  going  to  for  car  sales.

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Sean Aylmer: It  seems  to  me  companies  like  SEEK,  REA,  Domain,  car 

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Sean Aylmer: sales,  they're  very  traditional  companies.  I  mean  they're  tech  companies, 

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Sean Aylmer: but  they're  based  on  very  traditional  industries  and  cyclical  industries. 

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Sean Aylmer: Whereas  things  like, I mean  WiseTech  Global  I  suppose  is  the  example, 

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Sean Aylmer: much  more  innovative  or  something  or  other.  Is  it  fair 

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Sean Aylmer: to  say  that?  Therefore  it  trades  much  higher?

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Elise Kennedy: Absolutely. I have to agree. And that's where technology, because we're still so early

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Elise Kennedy: a phase in most of the adoption curves, that's where

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Elise Kennedy: the valuation is for us justified to be higher on

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Elise Kennedy: those multiples, which we discussed earlier versus some others that,

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Elise Kennedy: you compared it to a bank that really doesn't have

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Elise Kennedy: as much growth or as much lead as is leveraged

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Elise Kennedy: to other macroeconomic forces. Versus, hey, we actually need to

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Elise Kennedy: drive adoption of say, Xero's accounting software or logistics software

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Elise Kennedy: when it comes to WiseTech. And that to me is

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Elise Kennedy: really why there's a bit of volatility when it comes

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Elise Kennedy: to markets in the short term, but longer term, if

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Elise Kennedy: you believe in the technology which they're bringing in, the

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Elise Kennedy: economic mold and the competitive landscape which they've created, these

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Elise Kennedy: companies will generate more dollars in the future versus the

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Elise Kennedy: others that might go up and down.

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Sean Aylmer: Elise,  thank  you  for  talking  to  Fear  and  Greed.

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Elise Kennedy: Thank  you  as  always  for  having  me.

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Sean Aylmer: That  was  Elise  Kennedy,  head  of  technology  research  and  director 

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Sean Aylmer: of  Equity  research  at Jarden.  This  is  the  Fear  and  Greed 

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Sean Aylmer: every  morning  for  the  full  episode  of  Fear  and  Greed. 

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