Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 382

Why tech companies trade at a premium

Compared to the US, where technology stocks are now the largest sector of the S&P500 at 27% of the index, Australia has a small tech component. Despite this, Australian businesses also face significant tech disruption, often by companies not traditionally associated with ‘tech’, such as Steadfast (ASX:SDF), James Hardie (ASX:JHX), CSL (ASX:CSL), Resmed (ASX:RMD) and REA Group (ASX:REA).

Many companies are using tech to disrupt competitors, and with intellectual property investment only 2% of Australia’s GDP compared to 5% in the US, as shown in Figure 1, tech disruption has barely started on a long journey.

Figure 1: IP investment remains much lower in Australia than in the United States

An innovative way to measure tech disruption

Equity analysts at UBS Securities in Australia embarked on innovative research to measure tech disruption. They were asked to rate which stocks are most effective in using data and technology relative to peers in their sector. They also checked which stocks use tech phrases in their stock exchange updates, including references to artificial intelligence, machine learning, natural language, deep learning and predictive analysis. UBS reports:

"Appen, Telstra, Insurance Australia Group, PRO Medicus, Seek, ASX, Flight Centre, QBE Insurance and Xero mentioned these phrases at least 100 times over the past five years."

Overall, they found that stocks identified as tech focused had Price/Earnings ratios (P/Es) that were significantly higher than their peers. UBS then back-tested to show that stocks with high tech disruption scores outperformed stocks with low disruption scores by an annualised 14% since the start of 2016.

Table 1 shows the identified companies and their tech disruption and tech mention scores. 

Table 1: Key growth names

Tech stocks which UBS likes include Appen, NextDC, Nanosonics, and REA. Non-tech stocks with a high-tech disruption score or lagging share prices include Aristocrat Leisure, CSL, ResMed, James Hardie, Breville and Steadfast Group. UBS thinks Altium and Magellan are worth watching, all listed above.

Tech disruption explains Growth outperforming Value

UBS also finds that tech disruption is contributing to the ongoing outperformance of Growth over Value stocks, which is a major issue for fund managers who have built their businesses on identifying 'Value' (or companies trading at below their fundamental values). The increase in the valuation gap between high and low PE stocks has, in part, been justified by high PE stocks producing significantly higher earnings growth than their low PE counterparts, as shown in Figure 2. Tech companies are usually Growth stocks.

Figure 2: Earnings of ASX200 growth stocks versus value stocks since 2007

Since the start of 2007, earnings of growth firms have nearly doubled, while earnings of value stocks have halved. The high growth firms justify higher multiples due to their higher earnings growth. The earnings of tech disrupters have also consistently grown faster than tech laggards since 2016 (Figure 3).

Figure 3: Tech disrupters EPS relative to tech laggards

Tech disruptors are Growth stocks and benefit from lower rates

UBS has also written notes on how ultra-low rates are having a major impact on the prices of Australian equities:

"An additional insight from those notes is that a lower risk-free rate means that long-dated future cash flows matter more than near-term cash flows in a discounted cash-flow framework. Put differently, the terminal value component accounts for a greater proportion of the value of the equity. Growth stocks are longer duration assets (more cash flows in the future). Value stocks are shorter duration assets (less cash flows in the future).

Tech disruptors are Growth stocks and therefore benefit from lower rates due to their duration. 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. Lower overall market EPS growth is also positive for tech disruptors and other Growth stocks due to the scarcity premium that they command."

Figure 4 highlights the decade of Growth outperforming Value.

Figure 4: Growth outperforming Value since the GFC

 

In a note of optimism that investing is not only a tech story, UBS also notes:

"High quality industrials that are able to maintain solid earnings growth in a low interest rate environment are likely to outperform." 

The market is also seeing larger stock-specific price reactions to news events, as so much of the price is determined by long-term expectations. Either a threat to or affirmation of this future potential sends investors to buy and sell and the market catches the momentum. The potential for long-term durable competitive advantages is especially valued.

 

Graham Hand is Managing Editor of Firstlinks. This article draws on the work of Pieter Stoltz, Jim Xu and Paul Winter, Equity Analysts at UBS Securities. This article contains general information only and does not constitute personal financial product advice. It does not consider any investor’s objectives, financial situation or needs.

More articles and papers from UBS, a sponsor of Firstlinks, can be found here.

 

RELATED ARTICLES

Why August company reporting season was poor

How we have invested during COVID-19

Stocks near their 52-week lows: is it time to reconsider?

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.