Tech stocks have not been spared from the COVID-19 pandemic mayhem. There are worries that this once popular sector will keep lagging as investors flock to defensive stocks in the face of the crisis.
Seeking out ASX stocks with defensive earnings makes sense after the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) crashed into a bear market. But there's one tech stock that could be better placed than most to benefit from this thematic.
The only thing is investors will have to look outside of the WAAAX cohort. The acronym comes from the first letter of these previous market darlings – WiseTech Global Ltd (ASX: WTC), Afterpay Ltd (ASX: APT), Altium Limited (ASX: ALU), Appen Ltd (ASX: APX) and Xero Limited (ASX: XRO).
Tech stock with defensive growth
While some might think stocks like Xero is defensive given that accounting software will be needed even in a downturn, it's overexposure to small- and medium-sized businesses (SMBs) puts it at risk. The coronavirus-triggered shutdown of the global economy (including ours) will weigh more heavily on SMBs.
In that respect, those offering essential services to enterprise and government customers are much better placed to weather the looming recession.
Floating on a cloud
This is where cloud services group Nextdc Ltd (ASX: NXT) steps in. Goldman Sachs met a range of industry participants at the recent data centre and cloud conference and is feeling bullish about the near-term outlook for NextDC.
Datacentres are seen as a necessity and the non-discretionary nature of the service means customers can't cut back on spending in this area.
Further, the shift in demand towards datacentres in tier-2 cities puts NextDC in a good spot. This market has become the focus for all public clouds and NextDC is well placed to win contracts for tier-2 markets due to its dominant connectivity in Melbourne and Perth, according to Goldman Sachs.
Upbeat thematic attracting competition
While competition is heating up and margins could come under some pressure, pricing remains rational.
"Overall, we came away constructive that the drivers of demand remain robust, and are pleased with the positive commentary on T2 cities, given NXT is well-placed to benefit from this shift," said Goldman Sachs.
"We stay Buy NXT, given its strong (and relatively low risk) near term growth, along with significant, value enhancing projects on the horizon."
Foolish takeaway
These positives help explain why the NextDC share price is outperforming. The stock gained around 10% since the market started to crash on 20 February.
In contrast, the Afterpay share price tumbled over 60% and the Wisetech share price plummeted 40%. The remaining WAAAX members shed between 18% and 27% each.
My primary school teacher was wrong – it sometimes pays to have your head in the cloud.
Goldman Sach's 12-month price target on NextDC is $8.70 a share.
