In the decade-plus since the 2008 financial crisis, some lofty valuations for standout ASX tech stocks have been “partly justified” by strong earnings growth, UBS says.

And looking ahead, the bank reckons the market ructions to start September offer an opportunity to buy back into stocks at the forefront of the tech disruption thematic.

The insights formed part of research analysing the age-old argument between ‘growth’ versus ‘value’ stocks.

In short — companies that investors are betting on increased growth into the future, versus companies whose stock price represents compelling value relative to their current earnings metrics.

Based on money flows, the growth argument has won comfortably since 2017, with ongoing investor enthusiasm for tech disruptors tied to structural market shifts.

Australia’s buy now, pay later (BNPL) sector offers a good example of investors effectively valuing companies based on future revenues that are far in excess of what they currently earn.

In the case of market leader Afterpay (ASX:APT), UBS analysts think the market has overshot it. They recently argued that the company’s recent valuation above $90 reflects underlying sales growth of  more than 9,000 per cent over the next five years, to $170bn (from $18.4bn in FY20).

Instead, UBS forecast it will climb to $51bn, in which case Afterpay should be valued around $30 (it closed yesterday at $74.05).


Structural shift

However, additional research this month from the bank shows that on a broader level, tech disruption is here to stay.

For evidence, they pointed to a historical earnings comparison between companies categorised as either growth or value over the past 13 years.

And looking backwards, the proof is in the pudding: “Since the start of 2007, earnings of growth firms have nearly doubled, while earnings of value stocks have halved,” UBS says.

Another way of looking at it would be to say that (with the benefit of hindsight) while the market ascribed higher earnings targets to growth stocks, those companies did a better job of actually matching forecasts.

And UBS attributed those contrasting returns to the broader “tech disruption” that’s taken place in the Australian market.

For further evidence, they pointed to a notable divergence in earnings since 2017, which also “coincides with when tech disruptors began to outperform”.

Performance of stocks with high tech disruption scores. Source: UBS

Since then, marquee ASX tech names such as Appen (ASX:APX) and Xero (ASX:XRO) have surged ahead when compared to traditional ‘value’ sectors such as financial services.

The UBS team added that tech disruptors had increasingly benefited from the long-term structural downshift in interest rates, because that paradigm had effectively lowered the discount rate on all the future cash flows baked into valuations.

“Lower rates also mean that tech disruptors are able to finance technology at lower cost and take a longer-term view on tech-related projects,” UBS said.

So while growth stocks have a higher premium, in many cases they’ve justified it. In the wake of this month’s tech selloff, the bank’s analysts like the look of market-darling Appen.

Investors who took a punt on Appen’s growth story when it listed in early 2015 at 50c have been on an enjoyable ride, with the stock closing yesterday at $31.50.

However, the stock has fallen sharply from its late-August highs above $43, and now represents a possible buying opportunity, UBS says.

Among other tech disruptors, the bank’s analysts also like NextDC (ASX:NXT) and medtech company Nanosonics (ASX:NAN).