2 beaten-up ASX tech shares with major upside: experts

REA Group is one of the ASX tech shares looking compelling right now, says Morgans.

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Key points

  • Morgans has named two ASX tech shares as buys
  • TechnologyOne is a global provider of enterprise resource planning software
  • REA Group is the owner of real estate digital portals, including realestate.com.au

The experts at Morgans believe there are some compelling ASX tech shares that are looking good value following their share price declines in 2022.

While shifting interest rates do change the theoretical value of businesses, the underlying business hasn’t changed and still has plans for growth.

The share prices of the two businesses below have dropped quite a lot and brokers like the look of them.

TechnologyOne Ltd (ASX: TNE)

TechnologyOne is a global tech business that provides cloud-based enterprise resource planning (ERP) tools for businesses and organisations.

How much cheaper is the ASX tech share now? In early morning trading today, the TechnologyOne share price is $10.22. That’s almost a 22% drop since the start of 2022. And that’s despite the growth that the business continues to report.

The company recently reported its first-half results for FY22. Revenue from its software-as-a-service (SaaS) “and continuing business” went up 21% to $169.5 million. Net profit after tax (NPAT) rose 18% to $33.2 million.

TechnologyOne says it has completed its SaaS transformation, with SaaS annual recurring revenue (ARR) reaching $225.1 million (up 44% year-on-year).

The company continues to win large-scale enterprise customers. It’s growing quickly in the UK, where profit before tax more than doubled to $2.3 million.

TechnologyOne says it sees “significant” growth opportunities in the coming years and it’s on track to deliver continuing strong growth over the full year in the UK. The total addressable UK market is three times larger than the Asia Pacific region.

In the long term, it’s expecting to reach total ARR of at least $500 million by FY26 and achieve a continuing profit before tax margin of 35% over time.

Morgans rates TechnologyOne shares as a buy with a price target of $11.53.

REA Group Limited (ASX: REA)

REA Group owns a group of digital real estate websites including realestate.com.au and realcommercial.com.au.

The business owns stakes in property websites in other countries including the US and India.

This ASX tech share has a leading market position in the property advertising digital space, allowing it to charge higher prices because it gets more eyeballs looking at its listings.

Due to the fact that it gets the most potential buyers, this can attract the most sellers, which attracts more buyers, and so on. Its market power allows it to regularly increase prices.

REA Group saw increased profitability in the latest update – the three months to 31 March 2022.

Revenue rose 23% to $278 million, while earnings before interest, tax, depreciation, and amortisation (EBITDA) increased by 27% to $155 million. Free cash flow jumped 39% to $91 million.

The ASX tech share can use that growing cash flow to pay larger dividends, make acquisitions and/or strengthen the balance sheet.

At the time of writing, the REA share price is $111.32. That’s a 35% drop year to date.

Morgans rates it a buy with a price target of $145.40. That implies a possible upside of 30%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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