The largest ASX tech shares came under pressure in late 2019, as analysts squabbled over price-to-earnings (P/E) multiples and fair value estimates. But, despite this short-term pessimism, there is still value to be found in the Australian tech sector.
Aside from the large players, there are a number of good quality stocks in the sector that have reasonable P/E ratios and great growth prospects. Here are 2 stocks you should watch in the ASX tech sector.
Citadel Group Ltd (ASX: CGL)
Citadel Group is a software and services company that specialises in managing information in integrations. The company provides technology solutions to various complex work environments including the state and federal government and the private sector in Australia. Citadel earns the majority of its revenue from long-term managed services and software-as-a-service (SaaS) solutions.
The Citadel share price had a tumultuous 2019, finishing down more than 34% for the year. The company’s share price came under pressure earlier last year after Citadel released a trading update revising its earnings guidance for FY19 and announcing the resignation of the company’s CEO. Citadel posted a 44% decline in net profit of $10.9 million and 7% decrease in total revenue of $99.2 million.
Despite the turbulent year, Citadel’s business model is still viable as the company evolves from higher margin consulting services to Saas. Citadel is also looking to invest heavily in its delivery and sales capabilities in order to deliver a higher percentage of repeatable revenue.
Tinybeans Group Ltd (ASX: TNY)
Tinybeans is a free social media platform developed in Australia and targeted towards parents who want to share photos and videos of their children within a secure community. The company’s platform is designed to boost online safety by creating a contained, invite-only environment. This allows parents to upload photos and videos of their kids and securely share the content within an approved network.
Tinybeans generates revenue through advertising from brands, premium subscriptions and printed products. In the company’s most recent quarterly report, Tinybeans saw revenue increase 91% to $1.12 million in comparison to the prior corresponding quarter.
Tinybeans also experienced a 31% growth in monthly active users of 1.23 million, with an engaged user base of 3.5 million members across more than 200 countries. In addition, Tinybeans boasts a 76% retention rate for FY19 and is well poised for accelerating growth with a $5.6 million cash balance.
A report from Goldman Sachs entitled ‘Millennial Moms’ outlines the market opportunity presented to Tinybeans. According to the report, approximately $1 trillion dollars are spent on goods and services for babies and children. The market opportunity was reflected in the Tinybeans share price, which closed 2019 more than 229% higher, having reached a high of $3.52.
Should you buy?
The tech sector will still be under scrutiny among analysts in 2020. In my opinion, there is still value to be found in the sector with a few companies poised for growth. A prudent strategy would be to keep these companies on a watchlist and wait for positive price action before making an investment decision.
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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Tinybeans Group Ltd. The Motley Fool Australia has recommended Citadel Group Ltd and Tinybeans Group Ltd. 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.