How to identify the best tech opportunities on the ASX (and 5 companies that fit the bill)

Technology and the ASX are not normally synonymous. After all, our tech sector is far outweighed by financials and materials companies. We hardly have anything resembling the likes of Amazon (NASDAQ: AMZN) or Apple (NASDAQ: AAPL). But the truth is, the Aussie tech sector is punching well above its weight – if you know where to look in niche industries.

Stephen Wood, co-founder and portfolio manager for Eiger Capital, has a few rules for investing in this space. But to start with, it’s about the ability to expand.

“The best stocks on the ASX are the ones that have taken that niche and, not only developed a nice business in Australia, but have taken that niche and taken it global,” Wood says.

He cites Xero (ASX: XRO) and Wisetech (ASX: WTC) as the local standard bearers for success on this front. 

There are also three smaller companies he thinks have what it takes, which Wood discusses in this episode of The Pitch, where he also shares his tips for identifying niche ASX tech stocks to consider.

Note: This interview was recorded on Wednesday 27 March 2024. You can watch the video or read an edited transcript below.

Edited transcript:
Can you give me a quick breakdown of the investment universe for cloud and digital in Australia?

If we look at the ASX300, there are 25 names across large caps, a few ex-50 and then another 20 odd names in the Small Ords before we get down to some interesting opportunities.

Obviously, they are more in the realm of microcaps. They are different to the US elephants that utterly dominate the space globally. In many instances, the companies we’re talking about will make major use of the platforms provided by companies like Amazon, Apple or Google, but they tend to be a lot more niche.

What are the key opportunities then for Australian investors who want to invest in this space?

The best stocks on the ASX are the ones that have taken that niche and, not only developed a nice business in Australia but have taken that niche and taken it global. Clearly, not in the realm of those seven US companies, but they’ve taken a handy little niche and have expanded well beyond Australia. 

At the end of the day, this software – if you get it right – can be deployed using a software-as-a-service (SaaS) type of platform. It can be deployed everywhere. There’s investment to convert the languages and there are different legal systems but they have been successful in spreading their tech everywhere in many instances.

Amongst the best companies, you are looking for management and a product good enough to spread beyond Australia, because then you end up with a great sustainable opportunity many years into the future. 

You’re not stuck with the Australian economy. Ultimately, the proof of the pudding is in the eating. It’s one thing to deploy a product, but in the end, as the company gets bigger, you’ve got to see that leverage where you flip from costs growing faster than revenue in the early years to then lining up. Then what we really want is, as companies get bigger and bigger, you start to generate significant cashflow margin.

The standard bearers for success on the ASX over the last 15 years have been Xero, the accounting software firm, and Wisetech, which have specialised in all things to do with customs, global logistics and trade.

Are there any other niches where you feel Australia is dominating on the world stage?

The three companies we like are a lot smaller than Xero or Wisetech who have shown the way over the last 15 years. They’ve got those characteristics we mentioned: global operating leverage opportunity and then ultimately generating positive cash flows in different degrees.

We’ll start with Life360 (ASX: 360) which has been the standout result across the small and mid-cap space in the recent reporting season. They’ve gone from showing rapid growth and some positive cashflows to being there and having opportunities around advertising to lever that up. They’ve got the 20% growth, a global opportunity and now there’s a business that looks like it can pay its way going forward.

Part of paying your way forward means that people will pay for your product and the product can cover its costs. In the end, if you have something that is just being subsidised by the share market and that’s your reason for being, it comes apart and the company collapses.

We think Life360 has all of those characteristics with its family circles and location apps and the technology it runs. It’s got a lot of opportunities to expand into new markets – the UK is being launched now and Australia is coming soon. The bulk of its base at the moment is in the US – it has adjacencies in car crash and roadside service.

Technology One (ASX: TNE) is another stock in the ASX mid-caps. It’s been around a long time. It is super successful in selling software to government bodies like universities, councils and state government organisations like water or power. 

They’ve done a really good job in Australia. They have the opportunity going forward to sell more products to their existing clients in Australia, but the big opportunity they’ve been toiling away on for 10 years is in the UK trying to pick up the first university client, the first city council. They’ve now achieved that. 

Now they’ve got the credibility, they can start doing what they have done in Australia. At the end of the day, the market is 3 times the size of ours. That’s a company that is more developed, more profitable and has a wonderful opportunity in the UK.

The third company I wanted to talk about is also an ASX mid-cap. NEXTDC (ASX: NXT), Australia’s leading data centre supplier. When we first met Craig Scroggie and the management of NEXTDC, they were running one data centre each in Sydney and Melbourne. There may have been a small one in Canberra and one in Brisbane. Now they are up to Sydney Six. It’s expanded monumentally in the last 10 years.

The thing with NEXTDC is that it supplies hubs or buildings for Google, Microsoft, and Amazon. Consequently, it is growing rapidly – even in the Australian context. The stat they quote is “n the last 18 months, we’ve switched from desktop to cloud and now cloud plus AI, we’ve generated more computer-based information in the last 18 months than existed cumulatively.”

That rate of growth looks sustainable for the near future. The business has been utterly transformed by the US majors – and they are their biggest customers. Having established their credibility in the Australian market, it’s early days but they now have a data centre in Auckland, one in Kuala Lumpur and there are opportunities for them to go to places like Japan.

Digging deeper to find the best opportunities

Eiger Capital is an active boutique Australian equities investment manager specialising in small companies. For further information, please visit their website or fund profile below.

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Eiger Australian Small Companies Fund

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