ASX technology shares are making a bit of a comeback but there's one in particular worth watching ahead of the August reporting season.
Tech darlings like the Afterpay Ltd (ASX: APT) share price, Nearmap Ltd (ASX: NEA) share price and Rhipe Ltd (ASX: RHP) share price have made strong gains over the past month.
But Morgan Stanley reckons it's the Audinate Group Ltd (ASX: AD8) share price that will deliver the best surprise among small- to midcap ASX tech shares.
Audinate share price has biggest upgrade potential
"Audinate's leadership position is clearly strengthening and we view its competitive position and rebound potential as underappreciated," said the broker.
"We see AD8 as a high quality name offering the best potential for FY22 consensus upgrades."
A consensus upgrade will likely send the Audinate share price jumping higher. Shares in the audio-visual networking technology company has rallied nearly 67% over the past year.
What is the Audinate share price really worth?
But there could be another 16% upside. Morgan Stanley's 12-month price target on the Audinate share price stands at $10 a share.
There are several reasons why the broker is so bullish on Audinate. Its Dante system is the dominant leader in its space and has strong competitive advantages.
While the COVID-19 pandemic impacted on the business due to restrictions on live events and concerts, Audinate is making a quick recovery.
Sales recovery stronger than market believes
"AD8 delivered record sales in 2-3Q as end customers invest in technology to support whatever a new normal looks like," explained Morgan Stanley.
"Networked AV shift is inevitable – and Covid-19 has accentuated its superiority. If industry forecasts are right, there could be another c. 20% upside to our Street-high FY23 revenue forecast."
Additional catalyst
Another key catalyst is the launch of Dante-enabled video products. Dante was originally developed to allow disparate audio equipment to be on a common network for control and monitoring.
The same value proposition applies to video equipment and the first Dante video products are now available in the market.
If video equipment manufacturers also embrace Dante, this will drive a further re-rating in the Audinate share price.
Don't overlook the risks
But the investment is not without risks. Most of Audinate's earnings are in US dollars and if the Australian dollar were to strengthen, it will translate to lower earnings.
There is also uncertainty about when or how quickly the live sound scene will recover – particularly for indoor concerts.
The adoption and sales of Dante video products may also be slower than what the market is anticipating. All new technologies take time to ramp-up.
Nonetheless, Morgan Stanley believes the rewards justify the risks. It reiterated its "overweight" recommendation on the Audinate share price.
