S&P/ASX 200 Index (ASX: XJO) tech shares are off to a strong start in 2023.
Leading technology stock WiseTech Global Ltd (ASX: WTC), a provider of cloud-based software solutions for the logistics sector, has seen its share price rocket more than 19% since the closing bell on 30 December.
Accounting software provider Xero Ltd (ASX: XRO) has also had an impressive first month, up more than 10% in 2023.
All told, the S&P/ASX All Technology Index (ASX: XTX) – which also includes smaller companies outside of ASX 200 tech shares – has gained 10% in the new year.
Those gains, of course, are all water under the investment bridge.
But before we address whether now is a good time for investors to consider adding these big tech stocks to their portfolio, let's have a look at what's helped drive the broader rally.
What's been driving the ASX 200 tech share rally?
While January has been a good month for many stocks, the tech sector has been a top performer.
A large part of that is because companies priced with future earnings in mind, like most ASX 200 tech shares, are highly sensitive to interest rates. And their share prices, in turn, are sensitive to where investors believe rates are heading.
That saw most tech stocks take a beating in the latter half of 2022 as interest rates rocketed higher from historic lows.
But with many analysts now predicting that the developed world is nearing peak inflation, and hence approaching the end of this central bank rate hike cycle, growth shares like tech stocks have retaken a prominent place on investor wish lists.
According to Perpetual Global Share Fund portfolio manager Thomas Rice (quoted by The Australian Financial Review):
January has been a very strong month and, according to the market, the end of the interest rate rising cycle seems to be in sight. So we might see tech stocks have another leg down at some point, but a lot of them faced pretty significant pain in 2022, so some may have really bottomed out.
Portfolio manager at Ophir Asset Management Andrew Mitchell points out the importance of investing in profitable tech shares in the new era of higher rates.
"The narrative has shifted for unprofitable tech; get profitable or show clear path to profitability or someone else will take the reins," he said. "The days of relying on [limited partnerships] to continuously fund an unprofitable tech company are gone."
Buy now or wait?
Turning to WiseTech first, the ASX 200 tech share posted some very strong results for the 2022 financial year. That included a record statutory net profit after tax (NPAT) of $195 million. WiseTech also boosted its final dividend payout.
The results impressed most analysts, including First Sentier Investors head of Australian equities Dushko Bajic, who pointed out that WiseTech has been benefiting from its investments in the quality of its products.
"Amazing result — 24% revenue growth converting into 70% growth in profits and cash flow," he said. "Return on invested capital rose from 20% to 32%…. Organic growth of its software product was 35%."
And he believes that growth runway has a long way to run.
"Many years to come of strong revenue and earnings growth," he said.
So, that's one ASX 200 tech share that could well be a 'buy now'.
As for Xero, the company reported a 30% lift in its operating revenue for the half year ending 30 September. That came in at NZ$659 million.
And the ASX 200 tech share is a solid buy according to Goldman Sachs, which just placed Xero on its top stock list.
Among the positives, Goldman believes Xero also has a lot of potential growth ahead of it, currently only claiming a small part of its total addressable market (TAM).
According to the broker:
Xero is a Global Cloud Accounting SaaS player, with existing focuses in ANZ, UK, North American and SE Asian markets. We see Xero as very well-placed to take advantage of the digitisation of SMBs [small and mid-sized businesses] globally, driven by compelling efficiency benefits and regulatory tailwinds, with >100mn SMBs worldwide representing a >NZ$76bn TAM.
Following the recent underperformance (absolute/relative), we see an attractive entry point into a compelling global growth story and our preferred large-cap technology name in ANZ.
Now, after the strong start to 2023, it's certainly possible these ASX 200 tech shares may come under some shorter-term selling pressure. Particularly if inflation and interest rates surprise to the upside.
But with a lot of growth potential ahead, I believe they both qualify as a 'buy now' for patient investors.
