A deep valuation rift has emerged between the larger established tech stocks and the loss-making minnows, with fears that many of the small ‘uns simply will run out of cash in a hostile fund raising climate.

Of course the collapse of Silicon Valley Bank (SVB) further erodes confidence in the smaller players, some of which had deposits with the stricken institution.

Stocks including EML Payments (ASX:EML), Whispir (ASX:WSP), Megaport (ASX:MP1) and Appen (ASX:APX) have lost 60-80 per cent of their value over the last year. The ASX technology index – laden with big names such as Block Inc, Wisetech Global, Computershare and REA Group – has declined about 7 per cent.

A year ago, the famously lavish tech houses were wooing staff with pinball machines and meditation rooms. Now the knives are out.

Software accounting pioneer Xero (ASX:XRO) recently retrenched 800 employees – about 16 per cent of its global headcount – while the Nasdaq based home-grown hero Atlassian let go of 500. Last week the NBN Co said it would disconnect 10 per cent of its workers.

On its screen of 85 ASX tech stocks, RBC Capital Markets estimates a median ratio of 17.6 times enterprise value relative to earnings before interest tax, depreciation and amortisation (ebitda).

But 41 of these stocks are loss makers – sometimes heavily so. But what if they become EBITDA positive in the 2023-24 year?

On RBC’s reckoning, 10 stocks are expected to do so. These include battery technology house battery innovator Novonix (ASX:NVX), Envirosuite (ASX:EVS), Family Zone Cyber Security (ASX:FZO), Frontier Digital Ventures (ASX:FDV), Harvest Technology Group (ASX:HTG) and Whispir.

A further four are expected to improve greatly on their current profitability: Alcidion Group (ASX:ALC), Bigtincan Holdings (ASX:BTH), Damstra Holdings (ASX:DTC) and Megaport.

Unfairly or otherwise, investors have become intolerant of companies that spend up big on the vague promise of future spoils and are demanding a path to profitability (and preferably before the next decade).

The well-followed cloud communications house Whispir doubled its bottom-line loss of $13.7 million, albeit with a 33 per cent EBITDA improvement to $6.03 million.

Whisper expects to have positive EBITDA in the second (current) half “and beyond”.

Whispir also had cash of $9.4 million, $US173,679 of which was lodged with SVB. Thanks to Uncle Sam’s Federal Deposit Insurance Corporation, these funds should be remitted back to the company by now.

Whispir’s path to prosperity is to de-emphasise the US market – for reasons unrelated to SVB – in favour of more alluring Asian opportunities.

Environmental consultant Envirosuite (ASX:EVS) reported a $500,000 EBITDA loss for the half – but positive earnings in the months of November and December.

Of Envirosuite’s revenue of $24 million, two thirds derived from its EVS Aviation arm, which takes on jobs such as redesigning air space to reduce energy usage and carbon emissions.

Of course, making a profit is one thing and making a meaningful one is another.

On RBC numbers, the cheapest profitable tech stock is the strife-prone EML Payments, which is trading on a 23-24 multiple of a mere 2.6 times.

Other small-cap tech cheapies are Damstra (4.9 times), Integrated Research (ASX:IRI, five times), Novonix (ASX:NVX, 5.1 times) and Appen (ASX:APX, 6.6 times).

The tech bargain bin also includes the franked dividend paying Bailador Technology Investments (ASX:BTI), which is trading at a 30 per cent discount to the $230 million valuation of its nine-company portfolio.

One of Bailador’s biggest investments is the last-minute hotel room wrangler Siteminder (ASX:SDR), which has $US10 million lodged with the SVB.

As with hotel digs, it’s best to avoid checking into banking’s fleapits.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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