The recent sell off across the S&P/ASX 200 Index (ASX: XJO) has hit tech stocks disproportionately, Wilsons Advisory says, creating two buying opportunities in particular.
In a research note to clients, Wilsons says the circa-6% fall in the ASX 200 has been accompanied by a far sharper sell off across Australian-listed technology stocks of about 25%.
As the Wilsons team says:
This is the largest drawdown in local tech stocks since the April 'Liberation Day' correction and stands in stark contrast to offshore markets, with the Nasdaq Composite for instance only about 7% below its recent highs and the S&P 500 IT sector down about 10% – highlighting the disproportionate pressure on Australian tech names.
Reasons for the large sell off include "demanding" valuations for many companies, meaning that, "even modestly underwhelming updates from WiseTech, TechnologyOne and Xero have been enough to trigger a sharp rotation out of the sector''.
Xero Ltd (ASX: XRO) and Wisetech Ltd (ASX: WTC) have also been dealing with the integration of major acquisitions, with the US$2.5 billion purchase of Melio by Xero and Wisetech's US$2.1 billion buyout of e2open.
Wilsons said:
Both deals have clear strategic merit, but carry integration risks, while they also face an ASX investor base that is generally sceptical of large offshore M&A. In Xero's case, the sizable capital raise appears to have contributed to material stock indigestion, with seemingly few incremental buyers for the stock post the raise.
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Uncertainty creating opportunity
So who does Wilson like in the sector? The Wilsons team said the recent pullback in technology stock prices "appears to have created attractive buying opportunities".
While past performance is not a reliable predictor of future returns, drawdowns of more than 10% have historically presented attractive buying opportunities in the tech sector for patient capital willing to look through near-term volatility. With the current drawdown, at about 25%, marking only the fifth drawdown of 20% or more in the past decade – and the largest since the 'Liberation Day' tariffs in April – this pullback appears to offer a relatively rare opportunity to accumulate high-quality tech names at discounted entry prices.
The first stock Wilsons has named as a key pick is TechnologyOne Ltd (ASX: TNE), which has fallen about 15% since reporting its full-year results recently.
Wilsons said the result was broadly positive despite some numbers coming in slightly below consensus, with pre-tax profit up 19%, well ahead of guidance of 13%-17%.
As the Wilsons team said:
Despite small misses on select line items, TechnologyOne's fundamental outlook remains intact. The decline in (the) share price following its result largely reflects the correction of its supernormal valuation – with forward P/E having recently peaked at about 90x – leaving effectively no margin for even a very modest miss at reporting. Most importantly, TechnologyOne continues to execute exceptionally well, and our conviction in the outlook remains as positive as ever.
With the company's valuation on a price-to-earnings (P/E) ratio basis now back within its "normal" historical range, "this presents a rare opportunity to invest into one of the ASX's highest-quality earnings compounders at a relatively attractive valuation'', Wilsons says.
They also note that "Canaccord Genuity Research has a 12-month price target of $42.15, representing 40% upside to the last close''.
Plenty of runway for growth
Wilsons' other key pick is accounting software firm Xero, which they said delivered a slightly softer than expected first-half result recently.
However, we remain constructive on the medium-term growth outlook and view the 14% share-price decline as overdone. With the stock already under pressure heading into the print, the pullback creates a particularly attractive entry point for investors with the medium-term growth story remaining intact.
Wilsons said they remain confident that earnings will continue to grow, underpinned by healthy subscriber growth and average revenue per user expansion, plus the monetisation of artificial intelligence tools.
Overall, with the growth story remaining firmly intact, Xero offers attractive value at current levels.
