MoneyTalks: Take a dip into the tech sector with Bell Direct’s five ASX stock picks

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MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Bell Direct market analyst Sophia Mavridis.

What’s hot right now?

“The information technology sector (ASX:XIJ) has been one to watch, having suffered heavy losses and falling 31% year-to-date,” Marvridis said.

“Macquarie say the valuations on tech stocks are still quite expensive and believe there could be a further 25% downside for the sector.

“The Nasdaq has declined 24% YTD and saw its worst monthly performance since 2008 in April this year.

“The Australian tech sector has followed the Nasdaq’s lead, and with such a fall it’s interesting to observe the tech sector’s reaction to the external market environment.”

What trends are you noticing in the sector?

Tech stocks are highly sensitive to interest rates – record inflation figures and global rate hikes have made it challenging for tech shares to advance in 2022, she said.

“The steady tech performers are the stocks with strong cash flows and earnings.

“Lately in tech, we’re seeing almost instant share price reactions to any indication of a slowdown in earnings, in stocks with high price-earnings ratios.

“In the current volatile market, any sense of pullback has provoked investors to quickly sell off these stocks.”

Top picks

ERD is one of Australia’s leading telematics companies, providing hardware and software for transportation management tools that simplify regulatory compliance obligations such as road user chargers (RUCs), occupational health and safety regulations, and the streamlining of fleet management (e.g. drivers, vehicles and auxiliary assets).

Marvridis said firstly, the company has a strong track record of average revenue per user (ARPU), as well as revenue growth.

“Secondly, upcoming product launches are significant opportunities to expand ARPU. EROAD has extremely attractive unit economics and internal rate of return of new contracted units.

“The company also has material growth opportunities in Australia and North America and are successful in a large and growing addressable market.

“EROAD recently reported a soft FY22 result, with larger than expected costs – this meant that EBITA (earnings before interest, taxes, and amortisation) and cash flows were below Bell Potter’s expectations, despite revenue being largely in line.”

Bell Potter view EROAD to have considerable growth opportunity and has therefore retained their Buy recommendation, however, have reduced their price target to $3.40 following its earnings coming in lower than its expectation.

APX is is a leading global provider of artificial intelligence data services and solutions to enterprise and government customers.

Acording to Marvridis, the company has attractive prospects through its two operating divisions:

  • Global Services, which services leading US tech companies that utilise Appen’s annotation tools and their training data products;
  • And New Markets, which provides services to smaller, non-leading tech companies. Additionally, Appen has a long track record of revenue growth and strong margins.

“APX also has a competitive advantage in its long-standing relationships with many of its customers, having been established in 1996.

“Most of the company’s revenue comes from repeat customers as they update and upgrade their products.

“Bell Potter currently has a Hold rating on APX, after the company received a non-binding proposal, which was then withdrawn.”

Appen also provided a trading update last week, which saw year-to-date revenue plus orders in hand for delivery increase by 14% compared to the same time last year.

In addition, a greater skew of revenue in H2 compared to last year is expected.

CAT is a leading global provider of elite athlete-wearing tracking solutions, as well as analytics for athlete tracking.

“The company recently reported its FY22 earnings results, which saw underlying FY22 EBITA loss of US$5.8 million, which was greater than Bell Potter's forecast loss of US$2.4 million,” Marvridis said.

“Following the release of CAT’s earnings, Bell Potter reiterated their Hold rating on the stock, and lowered their price target from $1.75 to $1.10.

“This price target is generated through a blend of the enterprise value/revenue valuation and discounted cash flow.”

The company’s FY23 guidance sees 20–25% growth in annual contract value (ACV) and positive operating cash flow, and although the company has flagged increasing supply chain challenges and cost inflation in FY22, there is still optimism for future growth.

Catapult is a global leader in a very under-penetrated market, with significant opportunity for growth.

360 is a market-leading app for families, which includes a range of features from communications to driving safety and location sharing.

“With more than 30 million monthly active users, Life360 is becoming a dominant brand at the centre of family life globally,” she said.

“The company is seeing increasing growth, with more than 1,300k paying circles and has grown this base by 39% in 2021 and 43% in 2022, despite Covid-19 disruptions.

“This growth has demonstrated the resilience in the subscriber base, exemplifying long-term potential as market conditions return to normal.

“Additionally, Life360 has the potential to grow its user base by entering and disrupting other legacy incumbents.

“This includes roadside assistance: Life360 launched their Drive Protect product, which disrupted the roadside assistance market and enabled monetisation in its user base.”

In the company’s recent AGM, its 2022 guidance was reiterated.

360 expects to finish the 2022 calendar year with cash and cash equivalents in the range of US$65–70 million.

This is below Bell Potter’s forecast of US$72 million, however the broker remains positive on the stock, and have maintained their Buy rating.

TNE is a SaaS company that provides ERP (enterprise resource planning) software.

Bell Potter forecast double digit underlying EPS growth for the company, in each of the next three years, justifying a PEG ratio (price/earnings-to-growth ratio) of between 2-3x in these periods.

“Additionally, TechnologyOne has the potential to increase its growth target. The company’s annual growth target is 10–15% growth in NPAT for a decade, however Bell Potter believe there is potential for this target to be lifted to 15–20% at some stage in the next few years,” Marvridis said.

“In TechnologyOne’s recent 1HFY22 earnings report, profit before tax (PBT) increased 14% to $42.6 million, which was 2% above Bell Potter’s forecast of $41.9 million.”

The company has strong financials and potential for future growth, and Bell Potter maintain their Buy rating on the stock.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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