ASX tech down 40%, small caps at 14x earnings. Where the opportunity is now

Over the past six months, a new term has entered the investment chat: the "SaaSpocalypse."

Australian technology stocks have fallen close to 40% from their October peak, Japanese software has been swept up in a global rout, and even profitable, cash-generative businesses with limited AI exposure have been dragged lower alongside genuinely vulnerable names.

But the sell-off has spread well beyond tech. Businesses like Motorcycle Holdings (ASX: MTO) and AMA Group (ASX: AMA) have fallen despite relatively stable underlying performance, casualties of sentiment rather than fundamentals.

That kind of indiscriminate price action often marks the point where sentiment and fundamentals disconnect, and where the most interesting opportunities tend to emerge.

The key question is no longer whether AI will disrupt software. It will. The more important question is which businesses are genuinely at risk and which are simply being priced as if they are.

In the Forager Funds Quarterly Fund Update Webinar and March quarterly report, CIO Steve Johnson, Portfolio Manager Gareth Brown, and Analyst Nicholas Plessas outlined where the sell-off has been warranted, where it has gone too far, and which stocks they are buying in the wreckage.

As Steve Johnson put it:

"Our job here is not to find great businesses, but to find great investments. And those two things aren't always the same thing."

That distinction, between avoiding risk and pricing it correctly, sits at the centre of the current opportunity set across software and small caps.

The sell-off has gone well beyond tech

This is not a narrow unwind in software or growth stocks. Across the ASX, small industrials, consumer names and low-multiple businesses have sold off together, with price action driven more by passive index flows than by any deterioration in underlying fundamentals. 

Australian small caps are now trading at around 14 times earnings, a level reached only three times in the past decade. 

As Plessas noted: "These have all since proven to be really good times to buy Aussie small caps, and we're seeing that right now." 

Johnson added the structural reason why these moments occur: "When you invest at the small cap end of the market, when the tide goes out, everything is going to go down and the market's not going to distinguish between one stock that may be suffering and another that's not."

Separating real AI risk from mispricing

The risks driving the software sell-off are genuine. But as Brown put it, "the recent sell-off has been broad and lacks sufficient discrimination." The market is treating large parts of the sector as if disruption is both inevitable and imminent, and that is where the mispricing emerges. 

The more useful framework separates businesses that are genuinely vulnerable - unprofitable, low switching costs, reliant on distant growth assumptions - from those that are resilient: mission-critical, deeply embedded in workflows, generating real cash flow today. 

The quarterly report highlights TechnologyOne (ASX: TNE), which upgraded profit before tax growth guidance to 18–20%, and Hansen Technologies (ASX: HSN), which delivered 16% recurring revenue growth - both sold off regardless. 

None of these businesses are expensive to use. All of them are expensive to lose.

The stocks being bought in the wreckage

Two new international positions illustrate where quality and value are currently aligning. Auto Trader Group (LSE: AUTO), the UK equivalent of Carsales, generates operating margins of around 65% and returns virtually all earnings to shareholders. 

It fell 40% on AI disruption fears. Brown was direct: "If our forecasts are right, this is a business that will likely pay out more to shareholders in dividends and buybacks over the next 10 years than the current market capitalisation of the stock." 

Sage Group (LSE: SGE), the MYOB equivalent for UK small businesses, was added as a top-five holding. 

As Brown asked: "Are you going to risk the eye of the board, of the tax authorities, and other important people there to save a few grand in software costs in favour of something that you've vibe coded off AI?"

On the ASX, Catapult Group (ASX: CAT) and Bravura Solutions (ASX: BVS) were sold at peak valuations and repurchased after significant falls. Plessas framed the Catapult case simply: 

"The average cost per team is around $29,000 a year. This is mission-critical software. You've got the data for all your players going back many, many years, and if you decide to turn it off, you've lost that data."

Japan: clean earnings, cheap valuations, strong growth

The software sell-off hit Japan late, creating what Brown called "a clear disconnect between weak share prices and strong underlying fundamentals."

The valuation case is stark and Brown was direct.

"We have a basket of stocks trading at about 20 times earnings. Adjust for cash on the balance sheet and that's about 17 times - significantly cheaper than US software, but growing quicker. We expect our basket to grow revenues by more than 20% over the next 12 months, and profitability more than 40%."

Japanese companies carry minimal stock-based compensation, meaning their earnings are real, unlike US peers, where it routinely consumes 15–25% of revenue. 

The quarterly report highlights two holdings that illustrate the opportunity.

Broadleaf (TSE: 3673) saw operating margins jump from 3.7% to 9.9% and its stock rose nearly 25% in the quarter when peers fell by a similar amount. 

Visional (TSE: 4194) delivered 28% revenue growth and a 25% operating margin.

The discipline of knowing when to sell

Opportunities like this are created partly by the discipline of selling when valuations become stretched. 

Macmahon Holdings (ASX: MAH) was held for 14 years and exited with the share price up 160% over the prior 12 months as the mining services sector re-rated to historically elevated levels. 

Johnson was measured: "It is still a cyclical business and hopefully we'll get a chance to own it again at some point." 

EML Payments (ASX: EML) served as the quarter's reminder that self-help stories require execution, with Johnson frank about the lesson: "This is a really good case of recognising that a thesis is off track here." 

The broader point is simple. Indiscriminate selling creates mispricings for investors willing to do the stock-by-stock work. 

As Johnson put it: "Pessimism is where we thrive."

There are plenty more stocks on the Forager watch list trading at interesting valuations. If you're interested in finding out more, subscribe to their monthly and quarterly reports.