The S&P/ASX All Technology Index (ASX: XTX) has had a ripper day, closing 4.18% higher on Tuesday. But it's still down 31% in the year to date.
The broader S&P/ASX All Ordinaries Index (ASX: XAO) finished 1.78% higher today and remains down 11% in 2022 so far.
So, you see the potential opportunity here.
ASX tech shares have been sold off much more than ASX shares overall in 2022. This is because rising inflation and interest rates have made technology investors nervous.
The Aussie tech market is pretty young compared to that of the United States. Young companies tend to be small-cap shares with market capitalisations of between a few hundred million and about $2 billion.
As they're in their growth phase, most of them carry a fair bit of debt (which gets much more expensive as rates rise, eating into profits). Many of them weren't profitable before interest rates rose, anyway.
So, not so attractive to investors when inflation is eating into their returns.
But that's short-term thinking. Here at the Fool, we advocate buying and holding for the long term.
Nick Sladen of LSN Capital Partners is thinking longer term, too.
Sladen writes on Livewire that "the current drawdown is presenting opportunities to invest in high-quality small cap businesses, with long runways for growth at valuations that are rarely seen".
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ASX small-caps 'strongest after major drawdowns'
Sladen says ASX small-cap shares are the go for better returns during the eventual recovery:
… while all cycles are not the same in terms of duration and performance, history tells us that small caps returns are the strongest after major drawdowns, with liquidity and valuations a major driver of this.
Valuations in small caps overall are now at levels only seen during previous periods of market turmoil (GFC, Euro Debt crisis) and for those companies that can deliver earnings growth, this will provide investors with a platform for strong returns over the medium to long term.
Obviously, the global economy has a way to go before inflation is under control and rate hikes stop. The share market is going to be volatile while this plays out.
But Sladen says analysts will eventually turn their attention to "which companies are successfully navigating the headwinds".
They'll also look at which ASX shares have been hammered most and now present attractive buying. In other words, ASX tech shares.
4 ASX tech shares to benefit
Sladen said the LSN Emerging Companies Fund has been taking advantage of the market sell-off.
There are four ASX tech shares that Sladen and his team like at the moment. They are Hub24 Ltd (ASX: HUB), Netwealth Group Ltd (ASX: NWL), ELMO Software Ltd (ASX: ELO), and Life360 Inc (ASX: 360).
He explained:
We consider the best return opportunities are in those companies that operate in structurally growing industries who can deliver earnings growth despite the difficult economic backdrop.
The specialist platform providers (HUB24 (ASX: HUB)/Netwealth (ASX: NWL)) continue to grow as they benefit from market share gains, providing annuity-style revenue, high margins, and strong cash flow. The industry tailwinds support a clear trajectory for growth over the long term.
Life360 (ASX: 360) is the global leader in family safety services with an addressable market of well over $12b. With a growing subscriber base and strong pricing power, the business is well-positioned to scale into profitability in the period ahead.
Elmo Software (ASX: ELO) is the largest domestic HR tech company which has compounded four-year organic annualised recurring revenue [ARR] of +38%. The company is on the cusp of profitability and has now attracted takeover interest.
