ASX tech stocks have a reputation for high growth, but it’s often difficult to gauge just when they have hit their ceiling.

But Surrey Asset Management is particularly clued in on the signs tech plays have further to run, having reaped the rewards from the success of PointsBet (ASX:PBH), Appen (ASX:APX) and Xero (ASX:XRO).

Surrey’s Australian Equities Fund has returned 17 per cent in the last 12 months. Meanwhile, Surrey’s benchmark index (the Small Ordinaries Accumulation Index) returned just 11 per cent.

Surrey Asset Management director and portfolio manager Nick Maclean told Stockhead his fund had “covered that market and then some”. He said several of his fund’s holdings, both large and small caps, had done well.

Since the COVID-wrecked market bottom in March, online bookmaker Pointsbet has rocketed nearly 750 per cent.

Meanwhile, machine-learning data company Appen has climbed as much as 155 per cent and online accounting and business services firm Xero is currently up over 61 per cent.

Appen and Xero have even gained notoriety as part of the ASX’s WAAAX (Wisetech, Afterpay, Appen, Altium and Xero) stocks equivalent to America’s FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks.

But while Pointsbet, Appen and Xero have all witnessed massive share price growth in just a few months, Maclean thinks there’s still more room for them to grow.

 

POINTSBET (ASX:PBH)

PointsBet listed in June last year at $2 per share and is now $11.02. While analysts have argued several ASX tech stocks have grown on hype alone, Maclean thinks PointsBet’s growth is “well earned”.

“We still own PointsBet even post the appreciation and it has been good for the fund,” he said.

“I think the best way to look at PointsBet is to segment their operations. In Australia they’re now EBITDA profitable which is an amazing effort considering the incumbents they’re up against.

But they’re now using that cash flow to help grow into the US, and rather looking at the US as a whole we look at individual states.”

Maclean noted PointsBet’s goal was to achieve profitability within three years in each state it broke into. Success in one state gradually unlocks the opportunity to enter others.

Additionally, the company is looking beyond its current niche of sports betting.

“These guys do sports betting but they also do generalised gaming, online casinos,” Maclean noted.

“They haven’t started that yet but are in the development phase of building that out and we think it’ll be a very positive complement to them.

In terms of the capital now, they’re well capitalised but that’ll depend very much on how quickly they roll out into different states.”

PointsBet (ASX:PBH) share price chart

APPEN (ASX:APX)

Appen is one of the few ASX tech stocks involved in machine learning and AI. Specifically it provides language technology data and services that are used to create AI and machine learning products.

Since listing in 2015 at 50c per share it grew to over $30 and is now an ASX100 stock.

While its recent financial results underwhelmed investors, Maclean sees value at current levels. This is particularly because the company expects results for the second half of 2020 to improve.

“We really like the cash generating ability of the business and have confidence in the second half weighting of the half yearly results — these guys have a December year end,” he noted.

Appen (ASX:APX) share price chart

 

XERO (ASX:XRO)

The New Zealand-headquartered accounting software play listed on the ASX in 2012 at under $5. It is now over $90 and easily one of the biggest ASX tech stocks.

Maclean said Surrey had held Xero stock “since day one” and still saw value.

“We think there’s quite deep value if you dissect the business into its individual components, similarly to what we’ve done with PointsBet,” he said.

Maclean admits Xero could retire from growing itself and look to grow profits instead but says the company is doing the opposite. It is using profits to expand its offerings and these are gradually increasing as a percentage of its revenues.

“If you look at Xero five years ago it was basically just a SaaS-based accounting platform, whereas now it’s turning into a whole business platform,” he said.

“We think they’ll continue to entrench themselves with their clients both because an accounting system is very much core to their clients operations, but then as they spread they become indispensable to their clients, and it’s also such a cheap product.”

“If I put that in context, we use Xero at Surrey Asset Management. As we take on more and more of their products there’s just absolutely no reason to leave Xero and join an MYOB, Sage or Intuit.

“Their technology is first class, they’re re-investing, they’re growing rapidly, they’ve got a best of breed product and continue to go higher, which is why it’s one of our biggest positions at the moment.”

Xero (ASX:XRO) share price chart

 

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.

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