After a "prolonged" period of uncertainty around the future prospects of many technology stocks, the dust is beginning to settle, and the companies holding true value are becoming apparent, Canaccord Genuity says.
In a new research note issued to their clients, the brokerage said their key positioning remained in metals and mining, "particularly commodities supported by supply tightness and favourable structural demand drivers, and underweight the banks, which have unattractive valuations, growth prospects and mounting credit headwinds''.
But they also turned their focus to the technology sector, which has been shaken by AI disruption concerns.
Image source: Getty Images
Sorting the wheat from the chaff
The Canaccord team said that global software-as-a-service (SaaS) stocks have staged a recovery since May 26, following previous sectoral weakness driven by concerns over AI hollowing out the business models of some companies.
They added:
After some surprisingly resilient results from some software companies listed in the US, market participants have appeared increasingly willing to challenge some of the more bearish interpretations of the theme and reassess which software stocks can be winners, particularly those that sit on the critical path of agent-driven workflows where AI proliferation drives consumption rather than displacement.
The Canaccord team said the new positivity had spilled over into the Australian market, with some ASX-listed software stocks experiencing a sharp upswing.
They said broadly re AI:
Our view on the long-term impact of AI on SaaS companies remains unchanged. We believe AI will to put pressure on weaker software models, but high-quality incumbents with genuine, difficult-to replicate competitive advantages (such as embedded systems, high subscriber switching costs, proprietary datasets) should prove more resilient to disruption and use AI to their advantage.
So which companies do they like?
TechnologyOne Ltd (ASX: TNE)
The Canaccord team says TechnologyOne is their preferred large-cap software pick, with its key upside being its AI tool Plus product, "which aids customers in actioning tasks within the system, among other things''.
They said that TechnologyOne is aiming to target adoption of 10% to 15% in year one and 75% by year four.
Thus, rather than disruption, TNE's AI narrative is monetising AI without needing to reinvent its core product through Plus adoption and high usage per customer.
Pro Medicus Ltd (ASX: PME)
The Canaccord team said Pro Medicus' earnings will be bolstered by a series of large contract wins, which are yet to be reflected in the profit and loss statements.
They said while its price-to-earnings (P/E) ratio was still high, it "is a very high-quality business with Pro Medicus gross margins of 99.7% and EBITDA margins of 77%, which is expected to expand above 80%''.
They added:
Concerns about AI's impact on PME ignores the complexities associated with large-scale hospital systems that PME has expertise in, with imaging embedded across information systems and clinical workflows. Its high cash generative business allows optionality to acquire developing AI tools for additional top- and bottom-line growth, nullifying concerns regarding AI's impact to PME's business.
Catapult Sports Ltd (ASX: CAT)
Catapult, Canaccord said, is the global leader in athlete monitoring, supplying its devices and software to about 4000 teams.
They said the growth opportunity is significant, with a total addressable market of about 20,000 teams.
They added:
With this, CAT is growing rapidly, with 3-year forward consensus Management EBITDA growth of 35% and operating leverage driving high incremental margins which is expected to lift Management EBITDA margins from 18% currently to 30% in FY30. While caught up in the ASX tech-related sell-off, Catapult is defensible against AI threats due to its physical wearables devices that AI can't replace and deeply embedded proprietary analytics data that is difficult to replicate and is mission-critical to manage player loads and optimise team strategies.
