December 20, 2017

Will the Oracle bid for Aconex change how the market values Australian tech?

Oracle’s takeover of ASX-listed construction software company Aconex — at a 47% premium — has ignited the debate over whether the Australian tech sector is undervalued.

The cloud platform, founded in 2000 by Melbourne friends Leigh Jasper and Robert Phillpot, had a market cap of $1.06 billion just days before the purchase was announced, which hardly compares to the $1.56 billion price offered by Oracle.

Atlassian founder Mike Cannon-Brookes reacted on Twitter, throwing a spotlight on local fund managers who may been undervaluing our own tech stocks for years. Tony Boyd, writing for the AFR, said it was time local fund managers “go back to basics and rethink how they value companies that don’t make profits or pay dividends”.

Why did Oracle see things differently to the market?

Oracle is proposing to pay a near 50% premium for a business that has generated a loss for four of the past six years. An investor focused on dividends is likely to find this confusing.

What we think Oracle saw in Aconex:

  • Strong unit economics
  • A huge global market opportunity
  • Clear product leadership
  • A massive global footprint
  • A business it could accelerate under its own umbrella.

Interestingly, Oracle made a statement that it will continue to invest in the Aconex platform at an even quicker pace than what has been delivered historically.

Tech-savvy investors look beyond near term profitability

Whilst it’s easy to name technology businesses that have not yet reached profitability, this has not swayed tech-savvy investors. Those who understand the list above are willing to sacrifice short-term cash dividends for much bigger upside in the long term (capital appreciation).

Australian VC funds are looking for technology companies positioned to create significant value in the long term. Bailador co-founder Paul Wilson highlighted in a previous blog post how current profitability is not the top priority for Software-as-a-Service (“SaaS”) businesses at the expansion stage.

What this means for Bailador investors

The general reaction to Oracle’s bid is that Aconex was previously undervalued by the market. In the chart below, we’ve compared the relative valuations of Aconex in October 2017 and post Oracle’s bid, alongside Bailador’s portfolio (ASX: BTI).

Aside from the obvious material uplift in Aconex post bid, another observation is that Bailador continues to value its portfolio conservatively. This is reinforced because the companies we’ve invested in share the attractive characteristics we’ve mentioned throughout this post.

This begs a final observation, which may be better poised as a question: is the market undervaluing the full long term potential of Bailador’s portfolio?