Macro Intelligence: As ASX tech stocks rally in May, will Xero, TechnologyOne continue to soar?

Article written by Nadine Blayney (ausbiz)

ASX tech wins the month of May

The S&P/ASX 200 Information Technology sector (XIJ) is up 5% over the past month, compared to 1.7% for the broader S&P/ASX 200 index. Over the past six months, the tech index is up a more impressive 24% compared to the broader market's 10.4% gain.

Technology has been the best-performing sector overall, with earnings upgrades for TechnologyOne (TNE) and Xero (XRO) helping to drive the outperformance.

The ASX tech sector's outperformance is arguably being driven in part by the enthusiasm for US tech, particularly as AI-hype sends the so-called Magnificent 7 to lofty heights. The Mag-7 now makes up around 30% of the total market capitalisation of the S&P 500 Index.

Upgrades in ASX 300 for May 2024

Earnings support key stocks

Macquarie's equities team points out the underperformance of the ASX as compared to the US, is the result of our market's lower weighting to technology and AI stocks. Despite that, Australia is home to some quality tech stocks, two of which reported their financials in May.

• TechnologyOne (TNE)

TechnologyOne shares surged after it posted a 16% rise in half-year profit after tax. The company declared an interim dividend of $0.058 cents per share, 10% higher than the previous year. On the outlook, TechnologyOne is expecting net profit before tax for FY24 to be 12-16% higher than FY23. Importantly, it predicts annual recurring revenue (ARR) will grow strongly, up 15%-20% over the full year, which is expected to double in size every five years.

TechnologyOne daily chart

• Analysts weigh in on TechnologyOne

In the wake of its results, Morgans and Macquarie upgraded TechnologyOne's rating. Morgans expects the medium-term profit growth rate should accelerate as SaaS can be used to help TechnologyOne sell more software solutions. Macquarie, meantime, lifted the outlook for annual profit before tax to 15%-20% growth from 10%-15%, after management raised its FY24 guidance saying, "Although there may be more attractive entry points, we like the medium term-story."

Ord Minnett is 'lighten' based on valuation, while Shaw and Partners would like to see more evidence of net revenue retention being sustained at 115-120%, as well as an acceleration in UK growth. Morgans lifted its price target on the stock to $14.50, while Shaw and Partners kept its price target unchanged at $17.50.

After the results, RBC Capital Markets initiated coverage of TechnologyOne at 'sector perform' with an $18.00 price target. It says the company's valuation and multiples imply the stock is fairly valued at the moment, but praised TechnologyOne as being one of the few ASX-listed technology names that achieves the Rule of 40 for SaaS players.

Analyst recommendations: mean rating and price target

• Xero

Xero's shares also rose the day it released full year results, with the New Zealand-based payroll software company posting a full year net profit after tax of AU$106.56 million compared to a loss the previous year. Cost control, asset sales and price increases drove the turnaround.

Xero daily chart

• Brokers raise price targets for Xero

Broker ratings were largely steady in the wake of Xero's results, however price targets for the company were lifted across the board. Price targets now range from $85.00 at Ord Minnett to Macquarie's $180.70 price target.

UBS said it was a strong result overall, particularly on free cash flow saying, "surprisingly XRO achieved the Rule of 40 this year." It has a 'buy' rating on the stock with an AU$141.90 price target.

RBC Capital Market analysts said, "We think management is being conservative with other cost levers to potentially pull to beat the FY25 target." It has a 'sector perform' rating on the stock with a price target of $130.00.

Analyst recommendations: mean rating and price target

• Ai-Media Technologies (AIM)

ASX tech stock opportunities for investors exist in the small end of the market with Gregg Taylor from Salter Brothers recently telling ausbiz Ai-Media Technologies (AIM) is a stock to watch. "This is one of the very few pure plays on the AI dynamic globally," Taylor said. "It's a business that does north of $60 million of revenue. Now, our view is it goes to $150 million over the next few years, and could easily be Australia's next unicorn."

Ai-Media Technologies daily chart

Analyst recommendations: mean rating and price target

Can ASX tech maintain momentum?

• Wisetech

The question is whether the gains will continue for ASX-listed tech companies after such a fruitful month, and as the likes of Macquarie call for a correction for equity markets in June, which is historically a weaker month for stocks.

“Tech's been going pretty well but prices at the moment are pretty elevated for Xero and WiseTech…so I think it's probably sideways for now.” Henry Jennings, Senior Market Analyst at Marcus Today recently told ausbiz.

Wisetech daily chart

• US rally broadening beyond tech

While Jennings says he is not worried about an interest rate hike hurting tech valuations, he warns the US rally will likely broaden beyond the tech stocks, predicting the Nasdaq will consolidate as the US enters the quieter summer holiday period.
Where the Nasdaq goes, the ASX tech sector is likely to follow.

Tech-heavy Nasdaq posts impressive yearly gains