Wilsons Advisory says the major pullback in ASX 200 tech shares has been overdone, and recommends buying two stocks right now.
As we reported last week, the S&P/ASX 200 Information Technology Index (ASX: XIJ) is now 22% lower than its September peak.
The ASX 200 tech stock index hit a record 3,060.7 points on 19 September. On Friday, it closed at 2,370 points, down 22% in just 10 weeks.
Meanwhile, the S&P/ASX 200 Index (ASX: XJO) has dipped by just 1.8% over the same period.
Here are the two ASX 200 tech shares that Wilsons Advisory recommends.
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2 ASX 200 tech shares to buy now
Wilsons Advisory equity strategist Greg Burke says it's mainly domestic factors putting a drag on ASX 200 tech shares of late.
In the meantime, he recommends we look for the opportunities. Helpfully, he names those opportunities in a new article.
Wilsons Advisory's preferred large-cap ASX 200 tech shares are TechnologyOne Ltd (ASX: TNE) and Xero Ltd (ASX: XRO).
Why buy Xero shares?
Xero is an accounting Software-as-a-Service (SaaS) provider.
The Xero share price closed at $122.25 on Friday, down 0.73%.
The second-largest ASX 200 tech share has fallen 24.8% since 19 September and is down 27% in the year to date.
Burke notes that the market has been cautious on Xero's acquisition of Melio, which he says is likely to remain loss-making in the medium term.
… we see the acquisition as strategically important.
Melio broadens XRO's product offering, deepens its North American presence, and strengthens its ability to compete with Intuit Inc (NASDAQ: INTU), while also unlocking additional growth levers such as enhanced cross-sell opportunities.
Burke said Xero's forward EV/EBITDA has "de-rated sharply" from about 38x in July to about 24x today – the lowest on record.
He compares the value on offer with Xero shares versus US rival, Intuit, which owns the popular Quickbooks accounting program.
While XRO still trades at a ~20% premium to Intuit, this is materially below its two-year average of ~47% (since XRO's profitability pivot).
Given XRO's three-year EBITDA compound annual growth rate (CAGR) of 23% versus Intuit's 14%, the market is currently assigning too small a premium, in our view.
Put another way, on a growth-adjusted basis, XRO appears undervalued relative to Intuit, with an EV/EBITDA-to-growth ratio of ~1.0x versus Intuit at ~1.4x.
Overall, with the growth story remaining firmly intact, XRO offers attractive value at current levels.
Why buy TechnologyOne shares?
TechnologyOne is also a SaaS provider but specialises in enterprise resource planning (ERP).
The TechnologyOne share price closed at $30.10 on Friday, down 0.07%.
The third-largest ASX 200 tech share has dropped 21.5% since 19 September and 1.7% in the year to date.
Burke says this presents "a rare opportunity to invest into one of the ASX's highest-quality earnings compounders at a relatively attractive valuation".
The strategist explains:
The decline in TNE's share price following its result largely reflects the correction of its supernormal valuation – with forward P/E having recently peaked at ~90x – leaving effectively no margin for even a very modest miss at reporting.
Most importantly, TNE continues to execute exceptionally well, and our conviction in the outlook remains as positive as ever.
Ultimately, we believe TNE warrants a P/E premium to both its own history and IT peers, supported by structural improvements in its growth trajectory (now a high-teens EPS grower) and its earnings quality (now predominately recurring), as well as our confidence in management's ability to deliver against consensus over the medium term.
Burke said Canaccord Genuity Research has a 12-month price target of $42.15 on TechnologyOne shares.
This implies a potential 40% upside for investors who buy today.
