The hoary old line goes that no-one rings a bell when a market has hit a low point, but in the case of the small end of the tech sector attentive investors may be picking up a faint chime or two amid the noise about ratcheting interest rates.

In fact, the bells may have started pealing a few weeks ago.

The accepted narrative is that rising rates are unhelpful for the sector, as they not only increase funding costs but also trim assumptions about what a growth company should be worth in future.

Now, the market’s assumptions about the pace of rate rises are moderating, despite the Reserve Bank of Australia last week pushing through its fourth increase in four months.

The thinking goes that central banks will only increase rates by so far before fears of a full-blown recession supersede the current anxieties about rampant inflation.

Amid this macroeconomic backdrop, tech stocks are having a moment.

The share price rallies are also being driven by quarterly or full year disclosures that show that many of them are having solid revenue growth and – perhaps most importantly – are inching towards profitability.

The S&P/ASX All Technology Index (ASX:XTX) is down 26 per cent over the last 12 months, but has bounced 15 per cent in the last month.

“Generally speaking, results and outlooks have been solid, cost growth is more prudent and pre-profit names are moving quickly to break even,” broker Shaw Stockbroking says.

One promising play is Whispir (ASX:WSP), which specialises in mass – yet tailored – communications to customers or staff.

For example, Melbourne public transport users witnessing or experiencing antisocial behaviour can text a number to generate a form that is filled in and seamlessly passed on to the police.

Other examples are cybersecurity warnings or a utility alerting its customers to outages.

Whispir racked up just under $17 million of receipts in the fourth (June) quarter, 26 per cent higher year on year.

Whispir also narrowed its loss by 16 per cent to $4.74 million and says it should be earning positive by June next year, which is something to shout about.

With $31 million of cash supporting a circa $120 million market valuation, Whispir looks cheap on a revenue multiple of a mere 1.5 times.

An established provider to SMEs, Elmo Software (ASX:ELO) has pre-released its results for the year to June 2022: revenue of $91.4 million (up 32 per cent) and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $7.1 million (up 11-fold on the previous year).

Elmo’s world revolves around HR, rostering and payroll tools. Cutting edge? Nuh. But in the ongoing war for talent, it helps to get the basics right, such as paying staff properly and promptly.

Management is confident of current-year revenue of $114-120 million and EBITDA of $20-25 million.

Once again, with a $270 million market cap, Elmo trades on a miserly revenue multiple of 2.8 times and could well post a small net profit this year.

In the life sciences sector Mach 7 Technologies (ASX:M7T) is moving at warp speed, with record sales of $33 million for the 2021-22 year, up 30 per cent. Operating cash flow has also improved by almost 500 per cent, to $6.7 million.

The US-focused Mach 7 provides medical imaging software and is often mentioned in the same breath as home-grown hero Pro Medicus, whose imaging tools have been adopted by a slew of august medical institutions such as University of California and University of Vermont medical centre.

The difference is that even after its 30 per cent share ramp over the last month Mach 7 is valued at $160 million, including $25 million of cash, while Pro Medicus is worth $5.44 billion.

Given the vastness of the small tech sector, investors have a cornucopia of choice and they can be – and must be – selective as to where to plonk their precious capital.

Pre-revenue concept stocks such as those developing artificial brain power have their place, although we can’t quite get our head around the $1.8 billion valuation ascribed to “neuromorphic AI chip” maker Brainchip (ASX:BRN).

But in the current sober climate the short term rewards will go to those with real revenue and – gasp – real earnings or at least a credible path to profitability.

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

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