The S&P/ASX 200 (INDEXASX: XJO) and ALL ORDINARIES (INDEXASX: XAO) continue to search for a true direction after falling and recovering 2% in less than 8 trading sessions. Despite the US–Iran tensions and volatility, the ASX did bounce back strongly in the past 4 trading sessions and continues to push higher towards the all-time high it set just 2 months ago.
While the index might be fluctuating at the moment, here are 3 fundamentally strong ASX tech shares that investors should be watching.
1. Dicker Data Ltd (ASX: DDR)
The Dicker Data share price experienced a sharp sell off in mid-November last year from a high of $7.20 to a low of $5.60. Following a positive market update and the director accumulating some shares, the share price has consolidated at the $6.80 level.
The company trades at a modest price-to-earnings (P/E) ratio of around 30, given its Q3 2019 market update that cited a 17.8% increase in revenue and 38.6% increase in operating profit before tax on the prior corresponding period (pcp). The company announced that it was tracking ahead of its forecast and expects full year operating profit before tax to be over $60 million for FY19. This would represent an increase of approximately 30% on FY18.
I believe Dicker is good value at these levels with sector tailwinds such as a growing demand for its managed service provider segment that addresses needs such as storage, cloud migrations and software analytics as well as the major refresh cycle for Windows10.
2. Data#3 Ltd (ASX: DTL)
Data#3 provides information technology products and services across Australia, Fiji and the Pacific Islands. The company has multiple business segments and specialisations that help customers maximise business value and returns on their software and infrastructure, while providing consulting services to assist its customers in their digital transformation.
The company provided a November AGM update that said it expects “to improve on last year’s first half pre-tax profit of $9 million … our current first half project is for pre-tax profit in the range of $11.0 to $12.5 million.” This would represent a growth range of 22–38% on pcp.
The Data#3 share price is quite extended at current levels, so it is one that I would prefer to watch from the sidelines until a better buying opportunity emerges.
3. Megaport Ltd (ASX: MP1)
Megaport offers connectivity and network services to allow for wider coverage, speed while reducing costs and enabling real-time provisioning across one platform. The company has over 535 enabled data centres within an ecosystem of more than 350 service providers in 100 markets across 21 countries.
Megaport recently initiated a $62 million capital raising to accelerate its growth story. The funds of the capital raising will be used to fund its further expansion in North America, Europe and Asia Pacific, accelerate its revenue and market share and keep the company financially healthy until it reaches earnings before interest, tax, depreciation and amortisation (EBITDA) breakeven.
In its FY19 financial results, Megaport reported a 78% increase in revenue while its normalised EBITDA was a $24.7 million loss (70% of revenue) compared to FY18 where it was 112% of revenue. The reason why Megaport can attract such an expensive valuation is because of the industry trend in cloud services. It’s players like Megaport and NextDC Ltd (ASX: NXT) that will power the way companies do business and manage their data for many years to come. The company’s EBITDA position is rapidly improving and its capital raising will further fuel the company’s journey to reaching a positive cashflow.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of MEGAPORT FPO. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited. The Motley Fool Australia has recommended Data#3 Ltd. and MEGAPORT FPO. 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 Scott Phillips.