ASX tech stocks: Broker views and Morningstar’s top pick

The Technology sector has defied expectations (and arguably, economic fundamentals) in 2023 so far. The ASX 200 technology index is up 20%, while the Nasdaq-100 has gained just under 35% since January.

Flip back the calendar less than eight months and the story was very different, with both the above-mentioned tech indices down more than 30% between January and the end of October 2022 – as we wrote at the time.

What’s going on? The buzz around artificial intelligence (AI) has lit a fire under the share prices of many tech companies. That’s played out most noticeably in the US. For example, chipmaker NVIDIA (NYSE: NVDA) and Facebook parent META (NYSE: META) stock prices are up 161% and 111% respectively in 2023 so far. But it’s also played out, to a lesser degree, among some local tech names – software firms Wisetech (ASX: WTC)  and Xero (ASX: XRO) have seen their stocks rise around 50% year-to-date.

Whether that’s largely driven by sentiment or something more sustainable remains to be seen (and there are plenty of sceptics, including analysts at Morgan Stanley and Maqro Capital’s Mark Gardner).

In the following article, I look at the views of several brokers on the five largest local technology stocks. I also ask an equity analyst, Dr Roy van Keulen of Morningstar Australia, for his views on the sector and his pick of the local players.

Wisetech Global (ASX: WTC)

The logistics software firm is the largest company in the local tech sector, with a market cap of $24.5 billion.

Citi rates Wisetech as NEUTRAL, having upgraded it from Sell on 7 March – at which point analyst Siraj Ahmed also lifted his price target to $64.10 from $53.65.

CLSA regards the company more positively, analyst Nick Basile lifting it to a BUY rating, from Outperform, on 23 February and boosting the price target to $75 from $67.

Market Index’s Broker Consensus widget labels the stock a BUY. As of 1 June, this shows 11 Buy ratings, 7 Hold, and 1 Sell.

Xero (ASX: XRO) 

The big name in accounting software was upgraded to OUTPERFORM from Underperform by CLSA on 22 May. Analyst Nick Basile increased his price target to $115 from $99.

Xero was downgraded to HOLD from Add by Morgans on 18 May, but analyst Nick Harris increased his price target to $101 from $97.

UBS upgraded the company to BUY from Neutral on 26 April, analyst Lucy Huang increasing her price target to $109 from $90.

Xero is a BUY according to Market Index’s Broker Consensus, with 15 Buy, 4 Hold, and 2 Sell ratings as of 1 June.

XRO shares closed at $106.21 on Thursday 8 June.

NEXTDC (ASX: NXT)

CLSA initiated coverage of the data centre operator on 1 May with a BUY rating. Analyst John Marrin set a price target of $14.50 for the company. Based on NXT’s latest closing price of $12.50, this presents 16% upside.

Jefferies upgraded the stock to BUY from Hold on 28 February, analyst Roger Samuel setting a price target of $12.09.

NXT is a STRONG BUY according to Market Index’s Broker Consensus, with 16 Buy, 2 Hold and 1 Sell ratings.

The company’s shares closed at $12.12 on Thursday 8 June.

Technology One (ASX: TNE)

The enterprise software company saw two broker downgrades and one upgrade on 24 May. Bell Potter dropped its rating to HOLD from Buy on 24 May, but analyst Chris Savage lifted his price target slightly to $17.50 from $17. (This followed his upgrading of the stock to BUY from Hold on 15 May.)

Shaw and Partners also downgraded TNE to HOLD from Buy – and lifted the price target to $15.70 from $13.60.

Jefferies upgraded the company to a BUY from Hold, analyst Wei Sim setting a price target of $18, up from $14.

Technology One is a SELL according to Market Index’s Broker Consensus, with 2 Buy, 10 Hold and 6 Sell ratings.

The company’s shares closed at $15.92 on Thursday.

Altium (ASX: ALU)

The design automation software provider saw a raft of rating downgrades earlier this year, with Jefferies, Jarden, UBS and Barrenjoy all downgrading the stock on 21 February.

Jefferies dropped it to HOLD from Buy, with Roger Samuel also cutting his price target to $42.09.

Jarden downgraded ALU to UNDERWEIGHT from Neutral, but analyst Elise Kennedy lifted her price target slightly to $32.30.

UBS downgraded the company to SELL from Neutral, analyst Lucy Huang cutting the price target to $37.30.

The stock closed at $36.79 on Tuesday 6 June.

Market Index’s Broker Consensus indicates the stock is a SELL, with 4 Buy, 9 Hold and 9 Sell ratings as of 1 June.

Morningstar’s perspective

On the tech sector more broadly, Morningstar analyst Dr Roy van Keulen emphasises something of a paradigm shift. He emphasises that firms are no longer granted the same license to spend or reinvest whatever gross profits they generate, with little scrutiny.

“There was a very low bar for investment and I think that might be reversing,” he says.

Van Keulen’s pick of the local sector is Wisetech, which he regards as holding a Narrow Moat – Morningstar’s measure of sustainable competitive advantage. He believes $90 is the true value of the company’s share price currently – what Morningstar terms the “fair value”.

“We believe the market still underestimated how much CargoWise – Wisetech’s core product – helps its customers outperform their competition,” he says in his latest research note.