It certainly has been a difficult start to the year for the Australian tech sector. For example, since the start of the year, the S&P ASX All Technology index has lost 21% of its value.
This has been driven by the prospect of higher interest rates putting pressure on valuation multiples.
What's the damage?
Goldman Sachs has been busy assessing the tech sector and notes that companies with little to no profits have been hardest hit. This includes the three Ns, Nearmap Ltd (ASX: NEA), Nitro Software Ltd (ASX: NTO), and Nuix Ltd (ASX: NXL).
It commented: "Technology companies with low/no profitability have been hardest hit by rising rates, falling -40% on average since the Nov-21 vs -24% for profitable tech and -14% for US tech. […] with the median company de-rating -25% and NEA, NXL, NTO de-rating >50%."
Are there buying opportunities for investors?
Goldman believes this has created a few buying opportunities for investors. It notes that valuations are below pre-COVID levels now, despite the pandemic accelerating the shift to the cloud.
The broker explained: "A wide valuation gap has opened between profitable tech firms (trading on ~6x NTM EV/sales) vs. low/no profit firms (~5x) despite profitable firms growing at c.1/2 the pace. The ASX All Tech index has largely fallen in line with increasing real yields, with sector valuation now below pre-COVID levels while fundamentals are arguably stronger given the pandemic accelerated cloud/ technology adoption."
Xero shares are a buy
In light of the above, Goldman believes the Xero Limited (ASX: XRO) share price is in the buy zone. This is despite reducing its valuation to reflect lower multiples.
It commented: "Given the recent de-rating of high growth, low profitability technology peers, we decrease our Xero 12mf TP by -15% to A$135/share, driven by a mark-to-market on growth adjusted multiples. We make no earnings changes."
Based on the current Xero share price of $98.30, this implies potential upside of 37% for investors over the next 12 months.
