The Motley Fool

2 tech stocks to avoid and 1 to buy

Generally, I’ve been pretty positive about Australia’s tech sector over the past few years.

I mean it’s not that hard considering the strong tailwinds blowing behind the sector.

Rising data usage, smartphone ownership rising, mobile network coverage increasing and speeds rising. Not to mention increasing use of wi-fi and broadband and the proliferation of subscription video on demand services.

Then there’s the potential for e-health, smart homes and energy storage. That list only scratches the surface of the positives for the tech sector, but that doesn’t necessarily mean every company will benefit.

Here are two companies you might want to consider avoiding, and another that looks attractive…

BigAir Group Limited (ASX: BGL)

I was once a huge fan of BigAir’s superfast wireless microwave broadband offerings and the company’s model of rolling out its services to student accommodation, mining villages and large-scale events such as music festivals. However, in recent times, BigAir appears to have lost the ability to grow those services and has now morphed into an IT consultant and contractor. Those are much lower margin businesses and it’s a hugely competitive industry.

In the latest half year, the company saw underlying net profit rise just 7%, as the cost of sales almost doubled. Then you have competition rolling in from the likes of Telstra Corporation Ltd’s (ASX: TLS) growing national wi-fi network and fast mobile network, (oh, and the NBN). That could be a huge threat to BigAir’s business, and one reason why BigAir is no longer on my shopping list.

Aconex Ltd (ASX: ACX)

Offering collaboration software for the construction industry, Aconex is a business I would love to own a part of. The only problem is that after listing on the ASX at $1.90 in 2014, the share price has rocketed up more than 370% to $8.10 currently. With a market cap of $1.6 billion and an annualised net profit of just over $10 million, this is one company that is priced for perfection for many years to come. Investors might want to avoid Aconex for now – but keep it on your watchlist.

Trust me, you’ll get a chance to buy shares at a cheaper price at some stage down the track – I’ll be waiting too.

Appen Ltd (ASX: APX)

The provider of speech and language services, including helping Microsoft with its Bing search engine and Skype, Appen could be a huge winner in the years ahead. In an increasingly global world, almost any online retailer could sell their product to a buyer speaking any of the 6,500 spoken languages in the world. The need for translation services is growing and one broker report suggests Facebook and Instagram could be among the company’s newest clients.

Appen shares aren’t cheap – but then again, they also don’t have the whopping growth expected of Aconex priced in.

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Motley Fool writer/analyst Mike King owns shares in Telstra Corporation. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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