Top 10 tech stocks on the ASX in 2020

Investing in technology

A tech stock refers to any company operating in the technology sector – a space encompassing everything from e-commerce, semiconductors, social media and even cloud computing.

Despite operating across expansive industries, with the likes of Apple being thought of as a consumer-tech stock while Amazon may be viewed as a retail-tech stock – all technology stocks tend to exhibit a number of common characteristics.

Centrally, tech stocks often trade on high earnings multiples; or more recently high sales multiples, they often exhibit above average growth prospects and in many cases have limited physical assets – for instance, Uber owns no cars, Netflix owns no movie theatres, and Amazon, for a long-time at least, owned no retail stores.

The other common thread between many of the world’s leading tech stocks is a physical one: Silicon Valley. Located in the southern portion of America’s San Francisco’s Bay Area, this region, which many ear-mark as the global hub of innovation, is home to many of the world’s most prominent tech companies. Global heavyweights like Apple, Facebook, eBay, Twitter, Netflix and Tesla are all headquartered in the Bay Area.

This geographic exclusivity, mind you, has changed somewhat in recent years – with a number of promising tech stocks emerging across Asia and Australia.

Top 10 tech stocks on the ASX

With all that considered, below we take a look at the ‘Top 10’ tech stocks currently listed on the ASX. While you are likely have heard of many of the stocks below, we also examine a few emerging ‘wildcards’. Because of this, we have additionally split the ‘Top 10’ list between mid and small-cap tech stocks on the ASX.

1. Xero (XRO)
2. Afterpay (APT)
3. Wisetech (WTC)
4. Altium (ALU)
5. Appen (APX)
6. NEXTDC (NXT)
7. EML Payments (EML)
8. Zip (Z1P)
9. Brain Chip (BRN)
10. PKS Holdings (PKS)

^{*Specific periods in which revenue estimates are made, according to Bloomberg Data, is given in the individual company breakdowns below. Figures correct prior to the market open 6/1/2020.}

Best ASX mid-cap tech stocks

Xero (XRO)

In most basic terms, Xero is an award winning, cloud-based accounting software business. With lofty global growth ambitions, the company is currently focused on providing 'its 1.8 million subscribers with connections to a thriving ecosystem of 700+ third party apps and 200+ connections to banks and financial service providers.'

In step with those already impressive metrics, brokers have grown increasingly bullish on Xero’s prospects in recent times, with Morgan Stanley, for example, recently bumping up their share price target on the tech stock from $65.00 to $90.00 per share.

Afterpay (APT)

A disruptor at heart, Afterpay is a global leader in the fast growing buy now pay later (BNPL) space. Add to that a market darling, with the Afterpay share price more than doubling in CY2019 – rising 148% from January to December.

Though the company’s operations were once isolated to Australia – a market where the company continues to dominate – Afterpay has quickly grown its business internationally – already seeing success in the US and UK.

Wisetech (WTC)

A decisively complex company, Wisetech is a ‘global developer of cloud-based software solutions for the international and domestic logistics industries.’ With 12,000 organisations across 150 countries using WiseTech’s products, the company’s global presence is unmistakable.

Though concerns about the company’s acquisition strategy – amongst other matters – recently came to light following a sustained short attack from a US-based hedge fund, the company remains well liked by analysts – currently holding an average BUY rating and a 12-month price target somewhat above current share price levels.

Altium (ALU)

Though listed in Australia, Altium's (ASX: ALU) operations span the globe, with its central focus on ‘electronics design systems 3D PCB design and embedded system development.’

An obscure topic on the face of it: the company has managed to grow its revenues and share price significantly in recent times. A trend that is expected to continue on both fronts, according to Bloomberg Data, Altium is expected to grow its revenues to USD$209.9 million in FY20 – representing a potential 22% increase on the year prior.

Moreover, with a current share price of $34.04, there appears to be ample upside if Altium’s stock can reach the 12-month average share price target earmarked by analysts and according to Bloomberg Data.

Appen (APX)

A bleeding-edge technology company, Appen is centrally involved in developing machine learning and artificial intelligence products. Known as a leader in its field and described as the ‘industry’s most advanced AI-assisted data annotation platform’, Appen provides its services to global players in the technology, automotive, financial services and government sectors across the world.

NEXTDC (NXT)

As technologies proliferate many have theorised that data will become the NEW oil. While many have dismissed such a claim as overly grandiose, to understate the importance of ‘data’ in the 21st century would also be a mistake.

Though NEXTDC (ASX: NXT) is not as flashy as the likes of Afterpay or Appen, it has consistently grown its revenue in recent years and remains well liked by analysts. As the company describes itself, NEXTDC is centrally involved in ‘enabling business transformation through innovative data centre outsourcing solutions, connectivity services and infrastructure management software.’

According to Bloomberg Data, the current 12-month price target average from analysts may suggest that there is still significant upside for investors.

Best ASX small-cap tech stocks

While mid-cap tech stocks represent some of the most high-profile technology companies listed on the Australian Stock Exchange, some other promising opportunities are also available at the smaller end of the spectrum. Investors should understand that given their smaller size and often loss-making nature however – that these small-cap opportunities are inherently more risky than their mid-cap counterparts.

EML Payments (EML)

In broad terms, EML Payments (ASX: EML) is centrally involved in developing and offering 'financial technology that provide solutions for payouts, gifts, incentives and rewards and supplier payments.' With the fintech space exploding in value and importance its unsurprising that the company grew its revenue by 37% and its earnings (EBITDA) by 40% in FY19.

In-step with the above, EML was recently admitted into the prestigious ASX 200 benchmark.

Zip (Z1P)

Zip is one of Australia’s leading buy now pay later companies and a key rival of Afterpay (ASX: APT). Though Zip’s share price remained relatively subdued for some time, explosive user and merchant growth as well as a string of high-profile partnerships saw the company’s stock more than double in CY19. A capital raise announced at the end of 2019 is set to help Zip realise its lofty global growth ambitions, as well.

Brain Chip (BRN)

Maybe the most technologically interesting company on our ‘Top 10’ list, Brain Chip (ASX: BRN) is centrally involved in developing artificial intelligence technology ‘that is inspired by the biology of the human neuron - spiking neural networks.’ These neutral networks, as the company further describes: ‘can learn autonomously, evolve and associate information just like the human brain.’

Like PKS Holdings below, Brain Chip is thinly covered by Australia’s brokerage community – with only two firms following the stock. Even so, Shaw has a BUY rating and a price target of $0.25 per share on BRN.

PKS Holdings (PKS)

Listing on the ASX in June 2019, the tech-focused PKS Holdings describes itself as ‘an Australian Healthcare company that works with health organisations around the world to better capture, manage and leverage their human expertise to improve the performance of their business and deliver better patient outcomes.'

Though Shaw is the only brokerage firm currently covering PKS, they are bullish on the company’s prospects. Shaw currently has a BUY rating and a 12-month price target of $0.30 on the company.

^{*Average analyst rating, 12-month average price target average data and reported/ estimated revenue data all taken from Bloomberg Data.}

How to trade tech stocks in Australia

Now that we have examined some of the ASX’s ‘Top 10’ tech stocks, we take a look at some of the simple processes investors can use to trade these promising companies.

How to trade tech stocks

To trade the ‘Top 10’ tech stocks we have examined today, you can use IG’s market-leading CFD platform to capitalise on the price movements – LONG and SHORT – of the stocks we have mentioned today. Trading tech stocks on IG’s platform can be done in just a few simple steps.

• Create an IG Bank trading account or log in to your existing account
• Look for the tech stock you would like to take a short or long position in
• Choose your position size
• Click on ‘sell’ or ‘buy’ in the deal ticket
• Confirm the trade

Benefits of trading tech stocks

Though there are numerous benefits of simply buying and holding shares – the primary which may be summarised as a ‘set and forget mindset’ – there are a number of benefits to trading CFDs, especially for those who enjoy taking an active approach to investing. Three key benefits include:

• Leverage: Leverage allows investors to gain exposure to a relatively large position in a particular asset – with a reduced initial capital outlay. Use of leverage however may prove a doubled-edge sword for those not implementing appropriate risk management strategies: while it can maximise potential gains reaped by a trade, it can also maximise potential losses.
• Flexibility: Unlike buying an asset outright, CFD trading gives traders the flexibility to speculate LONG and SHORT on the price movements of an underlying asset. This means that traders can easily enter short (SELL) positions if they believe an asset is overpriced and will decline in value.
• Hedging: ‘A hedge is an investment or trade designed to reduce your existing exposure to risk. The process of reducing risk via investments is called “hedging”.’ The most common form of hedging involves taking a position – LONG or SHORT – that potentially offsets one or more other positions you currently have open. Given that IG’s CFD platform gives investors the ability to go long and short with relative ease, hedging strategies can be implemented with little difficulty.

ASX tech stocks outlook in 2020

As the overarching table of the ‘Top 10’ tech stocks on the ASX would suggest, some of Australia’s top analysts remain bullish on the prospects of tech across the country. Indeed, of every tech stock we’ve looked today, each of them has an average BUY rating.

Secondly, expectations around continued lofty top-line growth for the ‘Top 10’ tech stocks also remains intact – with many of these technology companies expected to witness strong double-digit revenue growth by the next calendar year, according to Bloomberg Data.

Optimistic caution is required

In saying all this – investors should temper these growthy expectations around some of Australia’s top tech stocks with some caution. A relatively recent Livewire article after all, cautioned that ‘Australian high-growth stocks, which the WAAAX stocks are a part of, are now the most overvalued in the world.’

A potential concern: yes. But a concern that the market is yet to truly appreciate it would seem – with many of the ‘Top 10’ tech stocks on the ASX currently floating around all-time-highs.

Click here to practise trading Australia’s ‘Top 10’ tech stocks with an IG Bank demo account now