Buy Hold Sell: 5 ASX tech stocks powering through AI panic

I think the good thing now is we've reached I think a point in time where the market is willing to start to differentiate the winners and losers from AI in particular. And as a result of that, we are seeing some opportunities in the tech sector. And in particular, leaning into those aspects where we do think they are beneficiaries. We do think those that look challenged or at risk of disruption from AI still look challenging.

Then if I think through to the margin side, margins could go two ways. So firstly on the AI as a threat side, do we see margin pressure when you're selling AI product? That is you sell a product, you've got a draw on token. So every time you use the product, it's got a cost associated with it, so it's lower margin product versus AI is inherently scalable. Sorry, software is inherently scalable. You build once, you sell many times. So it's a very high margin product. And so then, do we see margins actually potentially even improve? As software companies, they have large human capital, they've got a lot of people, a lot of software developers. So can they actually harness AI productivity gains which could drop through to margin improvement?

And then finally, we're really focused on those businesses which do need to change their pricing models. A lot of software doesn't in Australia. They're not linked to seat-based consumption or seat-based models, but we do see the likes of WiseTech. We want to see how successful they are at migrating that business away from seat-based fees to consumption-based.

Then one of the unappreciated assets of this business I think has always been that it's had this 1,000 data centre network distributed globally. And finally, with the acquisition of Latitude last year is actually able to monetise that asset base. And so what they are doing is they are effectively shifted into selling compute, GPU, CPU as a service. And they've signed a number of transactions recently, which are very much value accretive. That's driven earnings momentum, that has been very returns accretive and driven significant earnings upgrades for the business.

So we very much like the business. We liked it when they did the equity raise a month or two ago to support that business, but the stocks run really hard since then and north of $20 a share. Unfortunately, I'm a hold. It's a business that I really admire. I really like it, but at current prices, I do think there's better value elsewhere.

The networking business is benefiting significantly, we think, from cross-sell opportunities with Latitude. The other point I think that is probably understated here is the ability for these guys to continue to go and win very large contracts. They've got about 300 to 400 million of existing liquidity, but our industry feedback suggests they're in the market for over a billion dollars of debt.

If you look at how these businesses structured offshore and if you back solve typical IRR that they're getting on their bare metal computer around that 20% to 30%, that implies substantial earnings upgrades as they come through and execute on these contracts. And we don't think demand's a problem at all. It trades on half the valuation of its peer in the US digital ocean. So, yeah, we still really like it here.

TechnologyOne (ASX: TNE) 

So, yeah, Edward's done a great job in terms of how he's continued to try and lean into that theme. And I think going forward, to the point around concentration within the ASX and a lack of alternatives, we think this is one that people will gravitate towards. As a result of that, it is likely to stay on a premium multiple, so we're buy.

And when I think about the multiple, it is trading on high 20s EBITDA multiples. So it's certainly expensive or at the expensive end, but the market does typically pay up for quality, particularly also for consistency. And so for that reason, we think that whilst it's expensive, it's less expensive than what it has been up in the 40s historically. And so therefore it's a buy. You don't often get a chance to buy quality or growth cheap, but you can buy it less expensive and that's where we are today.

NEXTDC (ASX: NXT) 

And so NEXTDC as one of the leading players of the market with a great quality portfolio, attractive land bank and really strong relationships with top tier clients is really positioned well to benefit from that over the long term. So we are a buyer.

And one other thing I would just add on data centres, why do we like data centres? So they have low cost of capital businesses. You can put a lot of leverage into them to invest in long-lived infrastructure assets. They then go and sell that data centre capacity to blue chip, AAA, A rated clients with long leases at mid-teen levered returns. So you're getting a really nice incremental return on that capital that's being invested. And that's really at the heart of why we like data centres as a space.

And then if I layer on top of that for NEXTDC specifically, if I think about the valuation, I think it's very much an asymmetric risk story to the upside. The downside is protected by its replacement value. So when you get around $10, $11, very conservatively see that trading around replacement value. At those levels, someone would just come in and snap it up. That's how strong demand is for data centres globally. And then you've got a really strong pipeline which will grow the upside.

And at today's valuations, it's trading at around 17 times contracted EBITDA. EBITDA today is about 240 million. They've contracted over a billion dollars of EBITDA and transactions typically occur at 24 times EBITDA. So there's a really strong valuation case there as well.

And then if you look forward, we think there's some really exciting growth opportunities across the broader HMC platform in terms of what they could do with the energy transition platform down in Victoria where they have access to significant battery and wind, which we've heard from Albo today is going to be critically important for data centres going forward to build another facility and effectively add what will be a pretty strong growth layer to this business.

And then I think the other key thing is just looking at an evaluation point of view. It trades on half the multiple of NEXTDC. And on an NTA basis, it's about a 40% discount. So yeah, we think it looks attractive here.

They're building out a really strong pipeline of hospitals to continue to penetrate that US market, which we think will serve as really strong catalysts in the near term. Yeah, we see this as the next Pro Medicus on the Australian market. From all the feedback we've had from customers within the US, this is the gold stand within the industry. They're materially outperforming HeartFlow and clearly their main competitor. So, yeah, we think they're really well-placed over the next three to five years to generate some very strong growth.

And Xero is executing incredibly well. They're accelerating growth in the US. So they're gaining cost efficiency, so they're improving their margin. The product's getting better and better all the time. They've got a great AI product strategy. And then when I think about the valuation, oh my goodness, it is cheap no matter how I look at it, trading sub 15 times NTM EBITDA. If I do a reverse DCF, it's trading as if it has no future growth being priced in. And this is a business that has an ability to grow north of 20% CAGR top line over the long term.

And then finally, if you think about the cost of actually building the Xero platform, going out and winning almost five million subscribers globally, building a distribution network of over 250,000 accountants globally, I think the replacement costs would be close to where the stock's actually trading today. So for me, that's why Xero is the winner.