Plenty of the biggest ASX tech shares have had a terrible start to the year. However, some investors are now seeing this selloff as an opportunity to buy beaten-up businesses.
James Delaney, a portfolio manager at Sage Capital, has outlined two technology stocks that look like ones that investors may want to add to their portfolios. QVG Capital’s Chris Prunty outlined another opportunity.
Mr Delaney and Mr Prunty were talking to Livewire about some of these opportunities. Mr Delaney called his ideas “undeniably industry leaders, ticking all the boxes in terms of asset growth and having massive additional earnings growth headroom”:
WiseTech listed several years ago at a price that was thought expensive at 6.5x sales whilst the US 10-year bond rate was “trading on a multiple of 1.8 times”.
The WiseTech share price has grown significantly since listing and has expanded globally. However, the valuation is now 20x sales – its valuation compared to sales has increased three and a half times. The US 10-year is now at 1.86%. Mr Delaney said the reason for the change was how investors look at and value technology stocks.
So, why is the ASX tech share an opportunity?
The fund manager noted that the WiseTech share price has fallen quite a bit recently – it’s down over 20% since the start of 2022 – and the company is expected to keep growing so a fall in the share price makes it more attractive at a lower valuation multiple.
WiseTech is benefiting from the COVID-19 supply chain problems that need to be “untangled”. This shows how useful its software offering is.
Cloud accounting tech business Xero is another pick by Mr Delaney because of the network effects it has developed.
The fund manager believes that it has managed to create ongoing dominance in the industry in Australia and New Zealand, but it has also been growing in other regions around the world.
In the ASX tech share’s most recent result, the FY22 half-year result, it said that total subscribers had increased by 23% to 3 million.
Xero reported that Australia had 124,000 net subscriber additions to reach 1.24 million subscribers. New Zealand saw an extra 34,000 net subscriber additions to reach a total of 480,000 subscribers. The UK had 65,000 net subscriber additions, taking the total to 785,000. In the rest of the world, Xero saw net subscribers additions of 26,000 to 201,000 with strong progress in South Africa and Singapore.
Yet, the Xero share price has fallen 33% since the start of the year.
Hansen Technologies Limited (ASX: HSN)
Hansen Technologies is an ASX tech share that provides billing software and telecommunication and utility businesses.
It’s reportedly the biggest tech position in the QVG Capital portfolio.
Mr Prunty made a humorous point that Hansen is “super unsexy and boring” but the telcos and utilities would rather “chop off their own arms than get rid of something as integral to their workflows and customer experience as their billing and meter-reading software.
For that reason, Hansen has a very sticky client base. Other positives include that it generates a lot of cash flow, it has done well with acquisitions and it has a forward price/earnings ratio (p/e ratio) of just 7x.
Since the start of 2022, the Hansen share price has fallen by 8%.
In the recent reporting season, the ASX tech share reported that revenue grew by 5% to $148.9 million and underlying net profit after tax (NPAT) increased 13% to $23.6 million.
Over the long-term, it’s aiming to reach $500 million of revenue by 2025 with a long-term earnings before interest, tax, depreciation and amortisation (EBITDA) margin of more than 30% driven by an ongoing focus on profitability and operational leverage as it continues to grow the business.
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