The ASX tech share space has experienced considerable volatility, starting in November 2021. But there are some names within the sector that might be able to cope in a world where inflation continues to grip.
An inflation hedge can come in different forms. When it comes to ASX shares, their inflation hedging credentials depend on how companies are experiencing inflation and what they can do to pass their cost increases onto customers.
Certainly, there are plenty of commodity businesses that rake in profits when their related commodity prices increase. These include miners, energy producers, and farmers.
Some businesses are able to pass on the inflation they're experiencing, such as energy retailers and supermarkets. Indeed, Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) have both proven to be very effective at passing on inflation.
Yet, there are some businesses that may be finding it hard to balance between passing on increased costs to customers and trying to absorb them. Some businesses fear losing customers/volume because consumers simply don't want to pay as much. Retailers and eating-out options are between a rock and a hard place here.
Where do ASX tech shares fit in?
Many businesses across different industries are impacted by high inflation and higher input costs, particularly wages. For example, bricks and mortar retailers have both wages and rent as key input costs. The recent minimum wage increase will increase the costs for large numbers of employers.
But, many technology businesses operate quite differently compared to other sectors. They typically don't have a large employee base compared to other sectors, and the cost structure for other expenses is relatively lower.
Profitable technology businesses don't require large amounts of manufacturing facilities, a store network, logistics, or workers to do the job.
There are a number of ASX tech shares that could fit the bill including Altium Limited (ASX: ALU), WiseTech Global Ltd (ASX: WTC), Pro Medicus Ltd (ASX: PME), Gentrack Group Ltd (ASX: GTK), Life360 Inc (ASX: 360), and TechnologyOne Ltd (ASX: TNE).
If businesses have a relatively fixed cost base, they can deliver higher profit margins as they grow, achieving faster net profit after tax (NPAT) growth than revenue growth. This is key because investors often judge a business by its profit potential, not its revenue.
All of the ASX tech shares that I mentioned are looking at global growth, which means they have very large addressable markets. But many of them have price/earnings (P/E) ratios that largely reflect their growth potential, at least in the short term.
Even so, if inflation continues to stick around, the technology sector could be one of the ways to protect against it.
