High-growth ASX shares have felt the pinch in recent months as inflation and interest rate fears grip the market.
In the past month, the S&P/ASX All Technology Index (ASX: XTX) dropped a shocking 8% before recovering the last few days to be 1.3% down.
The theory is that companies in the fast-growth stage — usually in the technology sector — must burn through cash to increase their market share and revenue. So any rise in the future cost of money (i.e. interest rates) automatically downgrades their prospects.
According to Forager Funds Management senior analyst Alex Shevelev, these high-growth companies could be in one of 2 camps: those that will need to raise more capital to survive, or those that can survive without it.
Fellow senior analyst Gaston Amoros added in the Forager video that their Australian shares fund is pretty selective about these types of tech shares.
"We do own just a handful that we really, really like — and where I think we got very interesting entry points."
He and Shevelev presented two of those growth stocks that Forager currently favours:
ASX share going for half price, even though business is doing fine
There is no denying that shares for cloud communications provider Whispir Ltd (ASX: WSP) have taken a battering this year.
Closing Friday at $2.45, the stock is down 45.7% from its 52-week high of $4.51.
But Amoros insisted the company is doing everything right.
"They raised capital in April at $3.70 per share to fund the expansion into the US, which is a huge opportunity for them," he said.
"The company has since then met every single quarterly annualised recurring revenue expectation in the market… Yet the share price has neatly halved since April."
So the only reason these tech shares have been punished is the sentiment against businesses perceived to be sensitive to interest rate rises.
This phenomenon recently presented a great entry point for Forager.
"It's a very exciting business — they keep growing 25% to 30% per annum. They have a very low churn rate, 2%," Amoros said.
"Net revenue retention is 117%, which means the business grows nearly 20% every year just with existing customers."
A very sticky revenue stream
Shevelev admitted sports technology provider Catapult Group International Ltd (ASX: CAT) has "had its ups and downs in the past".
"A new management team took over 2 years ago and ran smack bang into COVID, which damaged their ability to sell."
So far this year, Catapult shares are down 7.6%. They closed Friday at $1.82, which is a far cry from the 52-week high of $2.32.
But the addressable market for sports technology is large and is "growing quickly", according to Shevelev.
"The level of contracted recurring revenue in this business is close to 80% of the total revenue, and growing quite quickly."
And like Whispir, Catapult's recurring business is also "a very sticky revenue stream".
"The churn is only about 5% per year."
Shevelev liked the recent capital raising round as it funded an acquisition that improved Catapult's video tech.
"It also put some capital on the balance sheet for them to spend over the next 2 years, when they will be free cash flow negative," he said.
"We think that at the end of that period the business comes out stronger. And management has some very strong growth targets… and have already shown some progress."
