Writing in its August 2018 monthly update, the top performing Celeste Australian Small Companies Fund said it had previously analysed WiseTech Global (ASX:WTC) and Altium Limited (ASX:ALU) and found it tough to make the valuations stack up.
That was before the WiseTech Global share price jumped 40 per cent in August and the Altium share price soared 37 per cent in the month as the tech high flyers reported results that were very well received by the market.
The fund says eventually all stocks, even tech stocks, have to operate and sell their product into a total addressable market (TAM).
It says based on the recent share prices, Altium is capitalised at $3.6 billion with a TAM of $1 billion, meaning it trades on 3.6x TAM. Similarly WiseTech is capitalised at $6.5 billion with a TAM of $5.2 billion, or 1.25x TAM.
Celeste says that whilst it is possible that addressable markets grow over time, the current valuations imply that both stocks are worth more than the total revenues of their entire addressable markets.
The fund says it thought the risk/reward skew for the stocks was to the downside before the big August share price moves.
Celeste now thinks the downside risk for WiseTech and Altium shares is even more now.
The fund does not own shares in either company. As at the end of August, the largest positions in the Celeste Australian Small Companies Fund included Reece Ltd (ASX:REH), AMA Group (ASX:AMA) and IMF Bentham (ASX:IMF).
The Bennelong Avoca Emerging Leaders Fund recently labelled some of the ASX tech stock darlings as vastly inflated.