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Five Aussie tech stocks to consider

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The launch of the S&P/ASX All Technology index – the mooted “Australian Nasdaq” – ran headlong into the COVID-19 Crash in February, with the new index falling 4% on its first day, on its way to a 42% fall by 23 March. 

But the tech index has rebounded by 57% since then, outperforming the broader market. 

The new index recognises the growing importance of technology shares to the Australian market and is likely to become a closely–watched gauge. 

This is particularly so for investors looking for growth. Some of the star stocks of the S&P/ASX All Tech index are global leaders in their field, and with growth constrained across much of the rest of the market, offer a pathway that is not readily available in the rest of the market. The major problem for investors, though, is the eye-watering price/earnings (P/E) ratios being asked, to participate in that growth. 

This is a big problem for Australian investors – they simply are not used to paying P/Es above 30 times–40 times, and it goes against everything they’ve been told. But if they want exposure to major tech leaders, that’s what they have to do. 

The solution for many will be to buy an exchange-traded fund (ETF) like the BetaShares Australian Technology ETF (ASX: ATEC), which aims to track the performance of the new S&P/ASX All Technology Index, or the ETFS Morningstar Global Technology ETF (ASX: TECH), which tracks a global portfolio of technology leaders that have a competitive advantage over other companies (the Morningstar Developed Markets Technology Moat Focus Index). But other investors will still want to go stock-by-stock. 

Here are 5 of my favourite tech stocks. (* = constituent of the S&P/ASX All Technology Index) 

 

1. Appen* (APX:ASX)

Market capitalisation: $3.5 billion

Analysts’ consensus valuation: $30.22 (Thomson Reuters), $29.47 (FN Arena)

Three-year total return: 123.1% a year

Appen is a true global leader in the development of high-quality, human annotated datasets for machine learning and artificial intelligence (AI). It creates the data that goes into the machine learning models of many of the biggest tech companies in the world. Mid-April, the company told investors that it still expects full-year underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of $125 million–$130 million, which would mean growth of at least 24% over prior year EBITDA. Appen is benefiting from the weaker A$ – most of its income is received in US$ – and it has a reasonably strong balance sheet, with cash resources of more than $100 million. It has not been greatly affected by COVID-19, given that most of its “crowd” of workers already work at home, and more are becoming available. Demand for its services from many leading tech giants has been growing very strongly in recent years and this trend shows no signs of abating. APX is shockingly expensive on traditional views of P/Es – it trades at more than 70 times last year’s earnings and 46 times this year’s expected earnings. But I think it should be a core holding – the long-term need for training data for use in AI, and all of the applications that AI goes into, is colossal. Appen is a small dividend payer, but that is not the reason to own this stock. 

 

2. Altium* (ALU:ASX)

Market capitalisation: $4.6 billion

Analysts’ consensus valuation: $36.98 (Thomson Reuters), $36.42 (FN Arena)

Three-year total return: 62% a year

Electronic printed circuit board (PCB) design software company Altium is also one of the ASX’s genuine global tech stars – and it has the P/E to go with that status, at 63 times historical FY19 earnings and 64 times expected FY20 earnings. Specialising in PCB design software means that Altium’s products are deeply embedded in the profound technological shifts that society and business are experiencing, in the rise of forces such as cloud computing, big data, artificial intelligence (AI) and 5G. The PCB is at the heart of the burgeoning use of “smart” connected devices in everyday life – Altium says it is “committed to achieve market leadership to the point of being the dominant provider of PCB design software by 2025.” The trend that the company is riding doesn’t look like slowing down over the next few decades – it’s what professional investors call a “secular” trend. Like Appen, there is a tiny yield situation in Altium, but that’s not why you hold it. 

 

3. Electro Optic Systems Holdings (EOS:ASX)

Market capitalisation: $625 million

Analysts’ consensus valuation: n/a

Three-year total return: 12.9% a year

The Covid-19 Crash has more than halved the EOS share price – that’s great for investors.  

EOS is an Australian technology company that develops advanced electro-optic technologies for the global defence and aerospace markets – the company has manufacturing operations in Australia, the UAE, USA and Singapore, and has struck strategic partnerships with some of the world’s largest aerospace and defence companies including Northrop Grumman, Hanwha and Hyundai. US giant Northrop Grumman holds about 5% of the stock. 

EOS exports more than 95% of its production. The company’s two biggest markets at present are remote weapon systems (RWS), which allow users to deploy existing weapons with the gunner located remotely from the weapon to avoid casualties from returned fire: EOS effectively invented this product class under various US Army contracts from 1993, and has recently re-invented the product with new technology.  From this base, it has developed counter-unmanned aircraft systems (CUAS) products – for which, read “anti-drone” systems. 

The company was expecting to boost revenue and EBIT (earnings before interest and tax) by up to 70% this year – it had more than $250 million worth of defence products ready to be delivered – but the Covid-19 quarantines and lockdowns have battered this plan. Normal deliveries are now expected to commence around September. EOS has reduced its 2020 guidance from 70% growth from 2019 to 25% growth and has raised $134 million in the meantime. EOS is tech exporter that has a very good niche – and the halving of the share price works for new investors. However, the company might need to convince President Trump that imported defence products are OK, if they come from a long-term ally. 

 

4. Audinate Group* (AD8:ASX)

Market capitalisation: $374 million

Analysts’ consensus valuation: n/a

Three-year total return: 12.9% a year

Digital audio-visual networking technologies provider Audinate is also a lot cheaper now than at the start of the year – $5.71 compared to $9 – and if investors can get over the fact that they could have bought it for $2.51 in March, they should lick their lips at that. Audinate has an outstanding technology called Dante, an audio-over-internet protocol (IP) networking solution, under which it has patented the way that audio-visual (AV) systems are connected and transport media over standard IT networks. A who’s who of audio-visual companies have licensed Dante and incorporated it as a networking AV standard. Dante has become a global leader and used extensively in the professional live sound, commercial installation, broadcast, public address, and recording industries. The Covid-19 downturn saw Audinate withdraw its revenue growth guidance in April, but the company remains fairly strongly positioned to withstand significant changes in sector and economic conditions, with about $30 million in cash on hand at 31 March 2020, and no debt. Audinate is another Australian tech stock that is well-known around the world, but not so much by investors. 

 

5. RPMGlobal (RUL:ASX)

Market capitalisation: $211 million

Analysts’ consensus valuation: n/a

Three-year total return: 14.9% a year

Australia’s core economic strength of mining is not just about digging up rock and extracting minerals: the services that have built up around the industry are also world-class. RPMGlobal is testament to that: virtually wherever mining is conducted around the world, miners use RPMGlobal’s suite of state-of-the-art enterprise software technology packages, such as HAULSIM (its mining simulation product), MinVu (shift manager software), the XPAC Solutions scheduling tool, the Underground Metals Solution (UGMS) mine planning optimiser and the Truck and Loader Productivity and Cost calculator (TALPAC) 3D truck haulage simulation software. Not only are these products very highly regarded for their effectiveness, RUL is right in the sweet spot of the laser-like focus that mining companies have on their costs and productivity – they are looking to control fully all of the aspects of their business that they can control, and RUL’s products allow them to do this. RUL has sold products in more than 125 countries. 

In FY19, total contracted value (TCV) from subscription licences sold was $10.3 million, up 505% on FY18, while annual recurring revenue (ARR) from subscription licences was $4.3 million, up 230%. In April, RUL told the stock market that TCV for FY20 was already running at $30 million a year, while ARR was running at $12.8 million a year. This is impressive growth, in a specialised tech sector. 

James Dunn is a financial journalist and commentator on 3AW and Sky Business. All prices and analysis at 16 May 2020. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.