Goldman Sachs has just slapped buy ratings on these ASX tech shares

These tech shares could offer strong returns to investors…

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The team at Goldman Sachs has been busy looking through the tech sector for new shares to recommend.

Two that it has found worthy of the coveted “buy rating” are listed below.

Goldman notes that these companies have nascent but growing offshore businesses, which it believes present substantial potential long-term upside if they can succeed in executing their respective domestic playbooks to achieve dominance in new markets.

Readytech Holdings Ltd (ASX: RDY)

Goldman is very positive on this provider of mission-critical software-as-a-service to the education, workforce management, government, and justice sectors. Its analysts have initiated coverage on its shares with a buy rating and $5.00 price target.

The broker explained that its bullish view is predicated on:

“The market has given RDY little credit for its improving organic growth rate since listing (~10% in 2H20 to ~17% 1H22) while the company has maintained solid margins. We think RDY will continue to grow organically at a mid-teens growth rate, with upside from assumed continuation of bolt-on M&A. RDY’s software metrics and unit profitability are strong (low churn ~3%, high LTV/CAC), suggesting scope for RDY to improve margins towards scaled peers over time (~22% FY22E on a fully-expensed basis vs ~32% peers).

In addition, Goldman highlights that the Readytech share price trades at a huge discount to its peers despite its organic growth. It explained:

RDY trades at a deeply discounted valuation vs peers (we estimate a >50% discount on a FY23E EV/EBITDA growth-adjusted basis) which we think can narrow on continued demonstration of its organic growth credentials. We see possible long-term upside from continued growth in the UK, and possible expansion into the US and Canada (we think most likely led by its Student Management and Work Pathways software).”

TechnologyOne Ltd (ASX: TNE)

Another tech share that Goldman Sachs is bullish on is enterprise software company TechnologyOne. The broker has initiated coverage on its shares with a buy rating and $13.90 price target. It commented:

“In our view, TNE is well-placed to meet its A$500mn FY26 ARR [annualised recurring revenue] target and we are more constructive than consensus and the market (as implied by TNE’s current share price). SaaS flip uplift, elevated inflation (via contractual CPI pass-through) and underlying business growth underpin our A$505mn FY26 ARR estimate, and we think risks are skewed to the upside with our estimates assuming modest organic growth ex-flip (~10%).”

As well as achieving its ARR targets, the broker expects TechnologyOne’s margins to increase beyond historical levels.

“In addition, we think TNE can deliver on its ARR target while expanding profit margins, delivering profit-before-tax growth at the upper end or above its 10-15% historical range. We sit 1-6% above FY22-24 Visible Alpha (VA) consensus EPS and highlight that TNE is trading at a similar multiple to the peak of the last Fed hiking cycle (22x NTM EV/EBITDA vs 20x Oct-18) despite a significantly improved NTM growth outlook (17% now vs 9% Oct-18) and recurring revenue base (SaaS ARR >80% total ARR today vs <50% Oct-18).

Finally, Goldman sees a lot of potential for TechnologyOne in the UK market, which it estimates to be at least three times larger than the ANZ market. It said:

Long-term upside can come from TNE’s growing UK business, which after a slow start appears to have taken a positive turn recently – important for TNE’s long-term growth runway and a possible source of meaningful upside to our medium-term estimates in a >3x larger TAM vs ANZ.”

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Readytech Holdings Ltd. The Motley Fool Australia has recommended Readytech Holdings Ltd. 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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