The 3 things Tech stock investors should look for, according to Reckon's Sam Allert

After a dismal 2022, tech stocks are making a comeback in 2023
We reached out to Reckon’s CEO Sam Allert and asked what a good tech company should look like
Why he thinks Reckon is a good company to invest in right now

Tech stocks had a shocking 2022 as higher rates and weak earnings caught up with sky-high valuations gained during the pandemic.

The tech-heavy Nasdaq plunged by 30% last year, marking the third-worst year since the 2008 crisis and the bursting of the dot-com bubble in 2000.

But there’s been a major rebound in 2023. The Nasdaq is so far up by 15%, while on the ASX, the Info Tech [XIJ] index is up 8%.

Experts believe that tech investors could stay away from that volatility if they invested in companies with a clear product focus that serves a growing, large market.

Against that backdrop, Sam Allert, the CEO of ASX-listed Reckon (ASX:RKN), believes there are three things investors should look for in a tech company:

1. Sustainable growth

“Going back a couple of years ago, there’s no question that it was all about high growth, and that’s what everyone was looking for in tech stocks,” Allert told Stockhead.

“But for many companies, even with their growth they weren’t generating cash.

“So they had to raise more and more capital, and there was a time where they were raising at valuations close to 15x times revenue.

“I understand the excitement around that and I’m a big believer in tech, but I could never get my head around those kind of valuations when there wasn’t a real clear path to profitability.

“For Reckon, growth at all costs has never been our philosophy.

“Our focus has always been on delivering the best solutions, but also making sure we’re generating profit and cash that ultimately enables us to invest in product development and marketing.”

2. Recurring revenue

“Tech investors are also looking for a much clearer and defined strategy structure from companies, in other words: where do you play and how are you going to win, ”Allert told Stockhead.

“Companies need to be able to articulate that strategy to the market.

“Investors also want to know how the strategy is performing, and the key metric they often look at is annual recurring revenue.

“Recurring revenue is a good metric to look at, because provided you’ve got a good product and service, there’s no reason for clients to switch.

“Obviously, every company gets a churn. But if you’ve got good annual recurring revenue, then there’s a good forecast that you can put out to the market for the next one or two years.”

3. Clear path to profitability

“Investors want to see companies that are generating that cash, and if not today, a very clear path to generating profit,” Allert explained.

“A high growth business is going to get much higher valuation provided that growth iss generating a profit, or on a very clear path to being profitable.

“Because with that profit you can reinvest, so you don’t have to raise more capital to invest in technology to keep competing.

“If you’re generating profit, you can invest that cash in product support, service and sales, and those are the key things that investors should look for, which all factor in business growth.”

Why Reckon could be in the driver’s seat

On Tuesday, Reckon reported a $4m net profit for the full year FY22 on a top line revenue of $51m.

The profit came despite the company investing a further $15 million into its products and development strategy.

Over the past year, Reckon has become a leaner, laser focused outfit after spinning off its Practice Management Accountant (APS) division for $100m to The Access Group.

Funds from the sale have been used to pay shareholders a special dividend of 57c, and reduce the company’s debt from $14.7m to $2.8m over FY22.

Allert said the all-cash price tag of $100m was a no-brainer for Reckon, considering that the company’s market cap at the time was $95m.

“The APS business was 30% of our revenue at the time, and here we are selling that business for more than our whole market cap, so it was a fantastic deal for shareholders,” he said.

That spinoff has now left Reckon with two core businesses – the Business Group and the Legal Practice Management Group.

The Business Group division is all about providing accounting and payroll solutions to SMEs in Australia, a business that Reckon started 30 years ago.

“We’re really focused in Australia and New Zealand for this product. It has grown for five years in a row now, and is highly profitable with a 51% EBITDA margin,” said Allert.

Meanwhile, the Legal Practice Management product serves legal practitioners mainly in the US, a lucrative market which could present blue sky opportunities for Reckon.

“Legal is the smallest part of our business today turning over $10m, but we believe it could be the fastest growing with a rapid upside over the next three or five years,” says Allert.

Both businesses have generated $37.5m of annual recurring revenue in the past year out of a total revenue of $51m.