Are Australian Technology stocks worth it?



As a trend, Australian technology stocks have outperformed resources stock in the last five years as indicated to some extent by S&P/ASX 200 Info Tech (INDEXASX: XIJ) that posted returns of over 41.42% (as of July 04, 2016) as compared to the S&P/ASX 200 RESOURCES (INDEXASX: XJR) falling over 48.26%. Several micro and small cap technology stocks have outperformed last year like Hansen Technologies Limited (ASX: HSN) delivered 41.51% in the last one year (as at July 04, 2016). On an average it has been seen that cloud computing technologies have been performing well due to their deeper penetration even to small business enterprises on account of access to cutting edge technologies, lower costs and greater savings. A study by Microsoft in 2012 revealed that up to 61% of businesses gained significant benefits by implementing cloud-based solutions to their businesses and therefore cloud service provider companies have gained in near past.


Daily Chart for XIJ (Source: Thomson Reuters)

However, many technology companies have suffered a setback owing to display of weak fundamentals. A recent example has been that of Guvera, the streaming music service company, whose float was blocked by ASX. This particularly emanates from the new guidelines that ASX intends to formulate to clampdown the tech IPOs which might not stand a good chance for the purpose of creating value owing to weak foundations. Accordingly, listing on the ASX might get difficult for tech companies without showcasing appropriate business strength. This is not only affecting Australian startup companies but also applicable to some Southeast Asian Tech firms who have been raising money via ASX. Some of the Southeast Asian Tech firms who have raised money via ASX have been iProperty and Ensogo. Although ASX has not made any official announcement but have worked around a consultation paper on the issue. The clampdown is expected to see ASX raising the bar on the financial requirements companies need to meet before they are allowed to list. This means companies need to raise more money to have greater market capitalisation. Thus, funds raising by IPO route through ASX listing is going to be difficult for early stage startup companies without showing any mettle. Particularly, the proposals have been said to entail rise in the profit test from $400,000 to $500,000 in the 12 months prior to admission and the net tangible asset threshold from $3 million to $5 million or company having a market capitalisation of at least $20 million, for the assets test. As per the Australian Securities and Investments Commission’s (ASIC) analysis of the situation, ASX listings have enormously moved away from resources to tech sector and backdoor listings have jumped by 164% between 2014-15. ASIC has already raised concerns over the businesses listing for foreign companies that do not generally relate to Australia causing a fall in listing standards thereby leading to a long-term damage. It is also expected that smaller Southeast Asian companies will not be able to use ASX as an exit option in the coming years as the startups need to comply with the higher standards. Therefore, the small startups might now go for their local stock exchanges for fund raising. It was sometime back reported that around six technology companies with revenues less than $140,000 were coming up with the listings in ASX, and the recent regulations from ASX could have dampened their listings. This included Drone Shield (ASX: DRO) which has otherwise witnessed a 15% drop since listing in late June 2016.


Drone Shield Daily Chart (Source: Thomson Reuters)

On the other hand, investing in IPO’s is not the only avenue of identifying bargain opportunities. We believe that there are several technology stocks in ASX that have the potential to generate lucrative returns to investors in the long term. For instance, Freelancer Ltd (ASX: FLN) has strong growth momentum to continue in the coming months driven by its products launch in several mobile applications including payment gateway, and payment and support method for more markets including China. With new brand and website, StartCon, Freelancer intends to further drive its revenues in coming period, consequently generating value to shareholders. FLN stock has already generated over 20.23% in the last three months (as of July 04, 2016). Even Altium Ltd (ASX: ALU) is expanding by acquiring Octopart and Ciiva. Furthermore, Altium has completed the largest multi-year TASKING deal with a tier 1 automotive supplier. The organic growth and benefits of acquisition would be reaped in near future. ALU delivered over 39.22% in the last six months (as of July 04, 2016) and still trading at an attractive P/E. Similarly, WiseTech Global (ASX: WTC) which demonstrated a successful IPO seems to be a promising company and has surged 18.25% since listing in April 2016.

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Although if one looks at the fact that technology sector only attributes for just 1% of the S&P/ASX 200 Index as opposed to about 20% for the US S&P 500 and 44% for Japan’s Nikkei 225, the tech sector in Australia would not be in much of a discussion these days. However, recent speculative technology stocks’ listings on ASX have created a buzz at a global level. Modes such as backdoor listings have been considered as a funding resort option and carry a different notion in the minds of investors. All this has thus led ASX to propose for better market value thresholds in terms of listing. At the same time, exceptions do exist. For instance, mobile game developer Animoca Brands (ASX: AB1) that came onto ASX through backdoor listing, has a market capitalisation of $40 million with many market analysts estimating for good growth for the company. What all this boils down to is that while ASX aims to tighten the screws in terms of listing standards, investors should always be wary of the selection that needs to be made when it comes to tech stocks and speculative IPOs.

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