'Better outlook': Goldman just upgraded this ASX tech share

Resilience and defensive revenues were themes behind the upgrade.

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Goldman Sachs has just taken Dicker Data Ltd (ASX: DDR) off its "sell list", upgrading the ASX tech share to a neutral rating.

The upgrade highlights Dicker Data's defensive revenues and strong balance sheet, among other points. At the time of writing, shares in the ASX tech player are swapping hands at $9.44 apiece.

Let's take a look at why the broker has made its decision.

Why Goldman upgraded this ASX tech share

The broker decided to upgraded the ASX tech share from its bearish view to a more neutral stance for three main reasons.

One, Goldman's analysis indicates the company's significant backlog headwinds are expected to ease. It sees this with a potential for a PC market recovery in the second half of 2024.

Secondly, despite softer revenue, Dicker Data is growing operating margins. The earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased from 4.4% to 4.8% this year. This is thanks to strategic acquisitions, Goldman says.

It says the ASX tech share "has executed well" on improving margins in the "volatile revenue environment across 2020-24". This could help grow earnings per share (EPS) moving forward.

DDR's high margins relative to peers, strong balance sheet and tight inventory management place
the company in a position to capitalise on market share opportunities as they arise.

Finally, the broker says Dicker Data is now fairly valued relative to distributor peers. It currently trades at a price-to-earnings (P/E) ratio of 20 times. At this valuation, Goldman says the risk-to-reward is "now balanced" for the company.

Since adding DDR to the Sell list on Jan 28, 2024, [Dicker Data] is down 23% vs ASX300 +1%, with the shares looking fairly valued vs distributor peers at ~19x NTM P/E vs ~23x at the time of downgrade.

The broker has a price target of $9.85 per share on the ASX tech player, around 4% upside at the time of writing.

What's next for Dicker Data?

Goldman Sachs acknowledges Dicker Data's challenging near-term revenue environment. The broker adjusted its revenue forecasts downwards for FY 2024/25/26 as "a more realistic assessment" of this.

The ASX tech share reported FY 2023 sales growth of 5.6% to $3.3 billion. It pulled this to net profit after tax (NPAT) of $82 million, up 12.5% year over year.

Dicker Data is "tracking flat" on this result, Goldman says, but there could be a tailwind if it sells through inventories this year.

"As supply chain challenges have resolved, DDR may be able to run down its inventory balance and generate higher free cash flow than expected, taking pressure off the balance sheet", the firm said.

The ASX tech share has been heavily sold this year. It's more than 20% in the red since January. Over the last 12 months, it has held onto a 12% gain.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has positions in and has recommended Dicker Data. 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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