As the broad market continues to roar, ASX tech shares have retained their place on the mantlepiece in delivering outsized returns to investors.
The S&P/ASX All Technology Index (ASX: XTX) is up 28% this year to date, ahead of the S&P/ASX 200 Index (ASX: XJO), which is 8% higher.
ASX tech giants Xero Ltd (ASX: XRO), Technology One Ltd (ASX: TNE) and HUB24 Ltd (ASX: HUB) have been particularly impressive, posting gains of 35%, 60 and 114% over the past year, respectively.
But the big question remains: Can this rally continue?
Despite high valuations, Wilsons Advisory believes these tech stocks could keep outperforming thanks to their positive growth outlooks. Let's take a look.
Why are ASX tech shares still attractive?
ASX tech shares are often hailed for their impressive sales and earnings growth. As such, they typically fall into the 'growth' category of investing in stocks.
Wilsons Advisory owns what it calls "structural growth companies" in its Focus Portfolio, which it defines as companies set to deliver earnings growth of 15% per year for the next half-decade.
Several of its holdings are ASX tech shares.
Although these shares often trade at high price-to-earnings (P/E) multiples, Wilsons argues that when benchmarked against the growth outlook, these valuations are justified.
With the ASX 200 Index offering only pedestrian earnings growth over the medium-term, we continue to see merit in remaining actively invested in sectors like tech that continue to offer attractive earnings growth…
…While 12-month forward PE multiples can be a useful tool for valuing more mature businesses, this approach simply doesn't work for valuing high growth companies, which requires investors to take a longer-term view.
Accordingly, we assess forward PE multiples over a 3–5-year time horizon to better encapsulate the future growth prospects of high growth companies in our valuation assessments.
The company sees plenty of value in the ASX tech space based on these parameters.
Current performers set to outperform
Wilsons portfolio manager Greg Burke highlighted ASX tech shares such as Xero, HUB24, and Technology One were attractive plays.
Why? Because they offer something that's in short supply elsewhere – earnings growth.
Moreover, each of these companies has benefited from strong individual growth drivers that aren't closely tied to the market.
Xero is on Burke's list given the company's focus on increasing its average revenue per user (ARPU) as a key driver of its growth. This, and the consistent pace of price increases:
XRO has established a cadence of annual price rises of ~6-9% across its product suite since 2021, which is likely to continue going forward.
Between July-September, XRO announced price increases of 6-9% in Australia and New Zealand, 7-10% in the UK, and 3-12% in the US, with industry channel checks indicating these have been absorbed well, with little churn among subscribers.
Meanwhile, Technology One also fits Wilson's criteria. The ASX tech share recently upgraded its annualised recurring revenue (ARR) guidance.
Management's target is to now achieve $500 million in ARR by the first half of FY25, with an ambitious goal of $1 billion in ARR by FY30.
This implies a compounding growth rate of 15% per annum.
We are confident that TNE will see further upgrades, given its demonstrated tendency of under-promising and over-delivering, its low market penetration with <15% market share in every segment, and our visibility into the many levers available to the business to drive ARR growth.
These include new customer wins, pricing, new product releases (e.g. DXP Local Government), and up/cross selling to existing customers.
Finally, HUB24 is another ASX 200 tech stock that has delivered strong gains this past year. Burke says the company is well-positioned to continue its growth.
After significant upgrades to HUB's consensus FUA and earnings estimates, over the near to medium-term we see scope for further consensus beats/upgrades…
Foolish takeaway
ASX tech shares still offer a promising alternative for those seeking growth in a market where opportunities can be scarce.
Wilsons Advisory says HUB24, Xero and Technology One might fit the bill.
