This surprising ASX tech share refuses to dive: analyst

One software stock has been resilient in the face of an industry-wide sell-off this year. And it still looks good, says this fund manager.

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A man activates an arrow shooting up into a cloud sign on his phone, indicating share price movement in ASX tech shares

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Technology shares have taken a pummelling in recent months, but some have weathered the storm better than others.

Growth stocks that rely on low interest rates for high valuations have been punished by the market over the past 6 months. Investors have been shifting to value shares that are more likely to be resilient to rising inflation.

Wilson Asset Management portfolio manager Oscar Oberg said this year had been a time of reckoning for high-flying ASX tech shares.

“We’ve really been able to differentiate the winners and losers in the technology sector,” he told a Wilson video.

“For a number of years, if you were a company that had ‘pay’ at the end of your name, you seem to get a huge re-rating, and you trade at 20 times sales. It does feel like those days are coming to an end.” 

Some of those deflated tech stocks include Afterpay Ltd (ASX: APT), which has fallen almost 40% from its 53-week highs; and Appen Ltd (ASX: APX), which is down nearly 70% from highs.

But not every high-flying tech stock has been absolutely hammered.

Why has Xero been so resilient?

One business that surprised Oberg with its resilience during the tech sell-off is cloud accounting software provider Xero Limited (ASX: XRO).

Its shares closed Tuesday at $132.01, not ridiculously far from $148.46 at the start of the year. The current price is also only 16% below the 53-week high of $157.99.

Oberg credited multiple factors in the New Zealand business for its success in retaining its valuation.

“It’s got such a high level of recurring revenues, it’s a SaaS [software-as-a-service]-based business, and it has very low levels of churn.”

Looking ahead, Oberg viewed Xero’s future favourably.

“Really confident around their market share growth they can get in the United Kingdom, Australia and the US over time.”

Oberg isn’t the only one who likes Xero for those reasons. On Tuesday, brokers at Goldman Sachs had a buy rating with a price target of $153, with a forecast that the Kiwi monster has potential for decades of strong revenue growth.

“Xero is still only scratching at the surface of its overall market opportunity,” The Motley Fool’s James Mickleboro reported.

“In FY 2021, the company reported an 18% increase in revenue to NZ$848.8 million, which was driven by a 20% increase in subscribers to 2.74 million. This compares to the cloud accounting subscriber total addressable market of 45 million.”

Xero is one of the largest technology companies listed on the ASX. It started life on the NZX and was dual-listed until 2018.

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Tony Yoo owns shares of AFTERPAY T FPO, Appen Ltd, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO, Appen Ltd, and Xero. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO, Appen Ltd, and Xero. 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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