The tech stocks analysts reckon will do well in the coronavirus crisis

The arrival of COVID-19 in Australia has led to government restrictions on travel and large social gatherings, leading people to spend more time at home for business, study, work and leisure.

Tech stock analysts said it was reasonable to assume the coronavirus crisis could speed up the adoption of remote, internet-based activity across Australian society.

“Things like Netflix and cloud-based accounting are well-entrenched, but I expect people are about to get significant exposure to online learning, remote working and take online shopping beyond occasional eBay and Amazon purchases,” Martin Pretty, director of investment management company Equitable Investors, said.

Remote working

While only a few schools have closed on a temporary basis due to the virus outbreak, government officials are openly talking about the possibility of wholesale school closures in Australia in the near future.

Telstra has told its employees that many may have to work from home for the next four weeks, and more Australian companies are likely to follow its lead sparking radical change to traditional work routines and practices.

Such developments could drastically increase demand for online business services ranging from cloud computing to software that support home working and home study, according to tech stock analysts.

“We have had a bit of expansion to online learning and anything that is digitised, and remote working looks to be benefitting,” Dean Fergie, director and portfolio manager at Cyan Investment Management, said in the context of the coronavirus.

He pointed to Readcloud (ASX:RCL), a digital content provider to schools and vocational training centres with access to leading publishers such as Oxford University Press and Harper Collins as a beneficiary.

“The stock has held up well and business continues to boom,” Fergie said.

Pretty agreed on ReadCloud as a stock pick that was well positioned in the marketplace, and added his pick of Schrole Group (ASX:SCL), whose cloud-based software enables schools to manage the recruitment and training of teachers.

MGM Wireless (ASX:MWR) with its Spacetalk smartphone, watch and GPS device that enables parents to keep in touch with their children is another pick of Pretty’s, and the company is soon to launch a product for older family members.

Other tech companies in the education space are 3P Learning (ASX:3PL), the firm behind the popular Reading Eggs and Mathletics programs for children, and online course provider OpenLearning (ASX:OLL).

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Secure computing

Tech companies providing secure computing services and core software could also see an upturn in demand with limited downside, analysts said.

“I imagine digital subscription-based businesses offering near ‘non-discretionary’ services will be best placed,” Pretty said.

Megaport (ASX:MP1) is a cloud computing company providing access to Amazon, Google and IBM platforms, and data centre operator NextDC (ASX:NXT) also specialises in cloud-based computing.

“Businesses are unlikely to let go of their cloud-based accounting services and other core software unless there is a significant cost saving available from a reliable competitor,” Pretty said.

He cited Citadel Group (ASX:CGL), a provider of IT and software services to government, health and security sectors, and MedAdvisor (ASX:MDR) which facilitates communication between pharmacists, drug companies, doctors and patients for the ordering and delivery of pharmacy scripts.

Fergie agreed that firms providing proprietary computer software were benefiting from greater demand.

“With people working remotely employers are having to buy more software licences for them to do so, and some software companies will benefit,” he said.

On this basis, accounting software companies MYOB (ASX:MYO) and Xero (ASX:XRO) could be poised for further growth. Companies leading change towards automation such as machine-learning data company Appen (ASX:APX) and Vection Technologies (ASX:VR1), a 3D modelling and virtual reality company, are also gaining traction among businesses.

Market correction

The ASX market’s correction following uncertainty around the impact of the coronavirus in Australia has repriced some tech stocks to lower levels, analysts said.

“They [tech stocks] are not trading at prices that six weeks ago people thought they would never see again,” Fergie said.

Tech stocks that are well positioned in their chosen markets and have sound financials will be able to make progress when stock markets recover, he says.

“There will be a time to buy into this market before conditions improve on the ground,” Fergie noted.

Pretty said some tech companies had suffered recent heavy price falls.

“I would say in relation to some tech stock valuations, ‘the bigger they are, the harder they fall,” Pretty said.

He reckons tech sector companies, especially smaller ones need to review their cost structures and capital requirements to ensure they can survive the current bear market so they can recapitalise when markets normalise.

Three factors would make a company attractive to investors in the current volatile market, according to Fergie.

“Where we would look at is a business that ideally has three things — companies that are cashed up and have no need for additional capital, have defensive earnings streams, and pay a reasonable dividend yield,” he said.

Fergie pinpointed several ASX stocks on the basis of these criteria, although some were non-tech firms, and included Kelly Partners Group (ASX:KPG), a single-brand network of accounting services firms, McMillan Shakespeare Group (ASX:MMS), a salary packaging and novated leasing firm, and Quickstep Holdings (ASX:QHL), a defence and aerospace components manufacturer.

Retail spend

Australian food retailers may see an increase in demand for online shopping in the current climate, but their supply chains and staffing are vulnerable to virus-related disruptions.

The same goes for online retailers providing electronic products or consumer goods. They could be affected if wage packets take a hit from people being unable to go to work.

“Any discretionary spending could be pared back,” Fergie said.

Travel-related firms including those with online offerings are also problematic in the current market.

“Clearly, you do not want to have anything travel related,” Fergie stressed.