MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at tech picks.
Today we hear from Lucas Goode from Investors Mutual who covers technology among other sectors.
He says while tech is disrupting faster than ever before, you still need to look at it with a traditional investing lens when making picks on the ASX.
“We always stick to our knitting in terms of seeking good stocks for a reasonable price,” he told Stockhead.
Goode says it can be difficult to know whether or not stocks truly fit into the tech bucket.
“It [tech] covers everything, we have holdings in NewsCorp (ASX:NWS) and Nine (ASX:NEC), no one would think about them [as tech] but most of NewsCorp’s value is in online real estate and half of Nine’s is in Domain and Stan,” he said.
“So it impacts every industry. Most companies are either being disrupted, doing the disrupting or a combination of both.”
Not all disruptors will be winners
Nevertheless, Goode warns it’s no certainty that the disrupted will perish and the so-called disruptors will win.
“Look at newspapers – Fairfax in their day had their rivers of gold of classified advertising, those rivers have long since dried up or rather were diverted into the pockets of REA (ASX:REA) and Seek (ASX:SEK),” he said.
“Everyone said newspapers were dead and their advertising feed would be taken by Junkee, BuzzFeed and Vice. Those companies never made any money – most went bankrupt – and you’ve got Financial Times, New York Times, the old Fairfax metro papers and Wall Street journal at record earnings.’
“I think companies can adapt to those changes – that’s where capable management comes in. Businesses that try and protect legacy cash flows and milk them aren’t adapting to those changes.’
“The pace of change is accelerating and it has lent itself to winners and losers, but we like to take a step back and look at the market because it feels each stock as a tech stock is classified as a winner but some of them won’t be winners.”
Entry point matters
And even those that emerge winners, may not prevail as fast as everyone thinks.
“I’ve heard some of the justifications for some of the more nosebleed share prices we see with tech-related stocks is people say it’ll grow into its valuation,” Goode said.
“One I’ve heard is ‘I would’ve been saying I overpayed for tech in 2000, but if I bought Amazon or Google I’d still be pretty happy’ but I’d say ‘If you bought Amazon in 2000 you probably also bought Pets.com and mind you, it took Amazon 10 years to get to its pre-bubble peak’.
“So I don’t know about you but I wouldn’t buy a stock if you think is going to do nothing for 10 years – entry point matters and that’s why we maintain our discipline.
“Your return on any security is a function of only two things: entry and exit plus dividends you get along the way. If you pay too much at entry you’ve blown up your returns.”
ASX TECH PICKS
HiPages (ASX:HPG)
HiPages is the largest online market place of trade services in Australia.
Goode says Carsales (ASX:CAR) is too expensive right now, he covered that stock as well as REA (ASX:REA) in the past and both made him fond of HiPages’ model.
“I love online portals as a business model,” he declared.
“In any vertical they’ve got phenomenal characteristics; these are companies that are natural monopolies and great building blocks for an ecosystem because they’ve got great network effects.
“In HiPages’ case it means more jobs which equals more tradies on the platforms which means more jobs and so on and so on.”
Additionally, Goode noted this specific vertical – tradies – was unique and still has a lot of runway.
“HiPages is three times the size and more technologically advanced than the number two competitor, but it’s still serving less than 10 per cent of the immediately addressable market and there’s a long runway to growth,” he said.
“Fantastic operating leverage, a lot of growth runway and on a relative basis compared to mature portals like Carsales and REA, it is trading at a material discount despite higher projected growth.”
HiPages (ASX:HPG) share price chart
ReadyTech (ASX:RDY)
This is another company Investors Mutual bought in at IPO, back in March 2019 and has continued to hold.
“At listing they had effectively two separate businesses – they share developers but they are different user end markets – one is education [in] student management systems and the other is payroll services: we use AussiePay which is one of their products at IML,” Goode said.
“Since then they made a smart acquisition in OpenOffice which is effectively local council software and it’s like a cloud native version of Technology One (ASX:TNE) and it’s been winning pitches against Tech One so we think there’s a lot of growth there.
“ReadyTech for us it’s a pure play born of the cloud business, it trades at a real discount to peers, still on a mid-teens PE multiple which just seems crazy for the growth they’re getting.
“It’s grown 15-20% organically with 40% earnings margins, it’s founder managed, excellent chief executive in Marc Washbourne – I think he’s one of the best CEOs I‘ve come across in my time in the markets, he’s passionate and the fact is its his baby.”
“We have a preference for owner managers because they think strategically and long term, and they will invest ahead of the curve and explain why they’re doing it.”
ReadyTech (ASX:RDY) share price chart
Infomedia (ASX:IFM)
This next ASX tech pick provides software to global auto manufacturers and dealers to support original equipment manufacturing.
It has lagged since its half yearly results in February which investors perceived as disappointing as well as raising $85 million in late April 2020 for M&A opportunities, but only finding one in early May this year in auto ecommerce platform SimplePart.
But Goode blames the difficulty it had in closing deals due to COVID-19 restrictions in Europe and says the deal will be worth the wait.
“As much as you can do some things over Zoom, I think [for] closing deals you still need boots on the ground,” he said.
“SimplePart has done a good job growing in North America [but] doesn’t have European or Asia-Pacific customers. Infomedia can introduce SimplePart into its global customer base,” he said.
Goode hasn’t forgotten its victory last November in winning Ford Europe as a client, and not just because of the name.
“The reason why it’s big is Ford is one of the owners of their major competitors, the fact Ford moved from a business they part owned to one of Infomedia’s product is a validation of that tool,” he said.
“We like the company on the basis of a medium term sticky customer base, long term contracts organic growth look out and also a pretty big M&A war chest.”
“So we think [it is] in a good position and again it trades at reasonable multiple compared a lot of the maybe popular or sexier tech stocks.”
Infomedia (ASX:IFM) share price chart
MNF (ASX:MNF)
Goode describes this company as “toll roads for voice communications for the cloud”.
“If you were waiting for an Uber and the guy was late or got lost and you called, that 02 number obviously doesn’t have a land line — they’re all hosted by MNF and Uber pays MNF for those numbers,” he explained.
“MNF also provides the software layer behind click to call ads on Google, whether it’s responding to a health insurance quote or booking flower delivery.
“[It’s a] really solid business, owner managed, Rene Sugo’s been running it for 20 years, fantastic growth outlook, they’re growing recurring revenue 20 per cent per year, launching into Asia – with Singapore in launching July, sounds like they have a couple more Asian countries on deck and ready to go soon – obviously massively grows the addressable market.”
“And [it’s] trading at enormous discount to US/UK peers on revenue multiple basis. I don’t normally like using revenue multiples but you have to use them there because unlike MNF, none of those other companies make money.”
MNF Group (ASX:MNF) share price chart
Ansarada (ASX:AND)
Rounding out Investors Mutual’s ASX tech picks is Ansarada which entered ASX through a reverse takeover of thedocyard, and Goode thinks its a “really nifty little business”.
“They provide information governance and collaboration platforms for M&A and capital markets deals,” he explained.
“[Ansarada] started out as online data rooms but now going into that broader business process management, Now their transaction management products are best in class.”
“In my previous life in M&A I used to use Ansarada and a couple of their major competitors – they were streaks clear and they’ve obviously invested in their product since.”
“They’ve taken market share, got a big offshore opportunity, and trading at less than 3 times revenue at the moment so a real discount to the rest of that microcap SaaS space.”
Ansarada (ASX:AND) share price chart
Disclosure: The author held shares in Hipages (ASX:HPG) at the time of writing this article.