TOL - 2nd Nov, 2022
Of these 10 ASX tech stocks, Morgan Stanley only likes three
US tech stocks have had a horror year in 2022. So bad, in fact, that their performance has garnered the colloquialism "Tech Wreck 2.0". (The Dot Com bust was wreck 1.0 for those playing at home).
The Nasdaq Composite is down 30% this year. Amazon is down 40%, Intel is down 46%, and Meta? Let's not go there. Ok, since you asked nicely - it's down 72%.
But broad brushing tech as one homogenous thing, as if the product or service it delivers is "tech", is misguided. Their offerings are different, as is their performance.
Apple, for instance, is down just 15% year to date, and just posted a fourth quarter profit of over US$90 billion.
As Bob Desmond went to pains to convey in a recent episode of The Rules of Investing, technology businesses should be understood from a product rather than sector perspective.
"'Tech' is such a broad term, and the media use it in very broad terms... Is Alphabet a technology business or a media business?"
This applies just as much to Aussie tech stocks. And thankfully for us - Morgan Stanley has just initiated coverage on ten Technology, Media, Internet & Telecoms (TMT) stocks. Some are well known, others less so.
In this wire, I'll get you up to speed by summarising Morgan Stanley's investment case for each of them.
MORGAN STANLEY'S TOP 10:
- Megaport Ltd (ASX: MP1)
- Hansen Technologies Ltd (ASX: HSN)
- Pexa Ltd (ASX: PXA)
- oOh!Media Ltd (ASX: OML)
- Hipages Ltd (ASX: HPG)
- TechnologyOne Ltd (ASX: TNE)
- Macquarie Telecom Ltd (ASX: MAQ)
- Aussie Broadband Ltd (ASX: ABB)
- Airtasker Ltd (ASX: ART)
- Appen Ltd (ASX: APX)
Megaport Ltd (ASX: MP1)
Megaport is a Network as a Service (NaaS) company, offering a platform that connects data centres with cloud service providers. To date, they have servers over 400 global data centres, with roughly 60+ of them connected to major cloud providers.
Morgan Stanley have initiated coverage with an Overweight rating, despite the stock falling 67% YTD.
It's currently trading on a 3-year FY22-25e sales CAGR of 35%+.
The broker puts MP1 in the "high-risk/high-reward category", with a bull case that acknowledges a shift to channel sales and draws inspiration from the scale achieved by Microsoft and Adobe.
"We see MP1 as a long-term growth story with clear network effects and structural tailwinds, which differentiates it from our broader coverage universe.
"In our view, MP1's pivot to channel sales will drive the next leg of growth and achieve scalability as the company aims to leverage unused capacity on its networks."
Hansen Technologies Ltd (ASX: HSN)
Hansen provides management and customer support software to the energy, water/utilities and telecommunications industries.
Morgan Stanley has initiated coverage of HSN with an Overweight rating.
"We think HSN offers investors something distinctly different from the other AU software stocks in our coverage."
Its organic revenue growth is relatively low, we estimate 1- 4% through the cycle, and thus it doesn't always screen attractive for investors ... but what caught our attention is excellent EBITDA and FCF generation ... which have consistently grown over a long period (FCF CAGR +13%, past 7 years) and outstrips AU software peers."
Key risks to the bull case, however, stem from tightness in the labour market, cost pressure on margins, customer churn, and key person risk.
Pexa Ltd (ASX: PXA)
PXA develops software used to digitally settle property transactions and register title changes and commands 90% of the domestic market.
Once again, the broker has assigned an Overweight rating, based on the domestic monopoly, attractive valuation, and possible penetration into the UK market.
"After the year-to-date weakness in PXA shares (-30% vs ASX -11.5%), we see an attractive risk-reward in a high-quality structural growth story. We initiate at Overweight, with a price target of A$16.50/share, implying upside potential of ~17% from current levels."
Not surprisingly, Australia's property downturn represents the key risk to PXA.
"PXA is a shallow cyclical business... Thus it is exposed to falling house prices and an associated decline in real estate transaction volumes."
oOh!Media Ltd (ASX: OML)
Many of you will be familiar with oOh!Media, operator of outdoor advertising billboards in Australia and New Zealand.
The broker has initiated coverage with an Equal-weight rating.
"OML operates in the structurally sound OOH segment, and it is a well-run business with a strong track record."
OML operates in an extremely cyclical sector, though, and the risks of an advertising recession are on the up.
"OML's revenues are wholly dependent on the advertising cycle, and, with a softening economic outlook for Australia and New Zealand, we expect to see a commensurate softening in ad spend over the near to medium term."
Hipages Ltd (ASX: HPG)
HPG has developed software that connects consumers with professional home improvement experts. The platform is free for consumers, while tradespeople sign up to 6- or 12-month subscription packages.
Morgan Stanley have initiated coverage with an Equal-weight rating, and cautions against the level of competition and the lack of a moat.
"Whilst HPG is making meaningful strides against its strategic roadmap, the crowded competitive landscape makes it difficult to establish a clear leadership position and realise benefits of scale."
Success for HPG will hinge on the extent to which it's able to develop the platform and algorithm in order to minimise "tradie churn", but Morgan Stanley points out that this requires extensive capital expenditure and carries significant execution risk.
TechnologyOne Ltd (ASX: TNE)
TNE develops and sell enterprise software to a range of industries including government, healthcare, education, and financial services.
The company is established in Australia and is expanding into the UK market, which received a kick-along with the acquisition of Scientia in 2021.
Morgan Stanley are initiating coverage with an Equal-weight rating,
"We believe TNE's transition to a SaaS revenue model increases its near-term competitive edge in the well- established ERM market. However, we see growing risks to the long-term prospects, given global competition with larger marketing and R&D budgets."
Some of those risks include a crowded market (which includes Workday, SAP, and Oracle), cost pressures on CAPEX costs, and a poor track record when it comes to executing in the UK.
Macquarie Telecom Ltd (ASX: MAQ)
MAQ is a mid-cap telco with three main verticles: telco services to enterprises and government entities; cloud solutions and security services, and it owns and manages data centers.
Unlike the stocks above, however, MAQ coverage has been initiated with an Underweight rating.
"... we see more attractive investment opportunities in our coverage universe."
Morgan Stanley views the fact it runs three businesses as disadvantages versus some of the market's other pure-play offerings." Namely, its enterprise Telco business is mature (and competes against larger players including Optus, Vodafone, and TPG), while its cloud businesses lack scale.
Aussie Broadband Ltd (ASX: ABB)
ABB is another mid-cap telco that resells NBN broadband services to Aussie consumers.
Morgan Stanley initiate coverage with an Underweight rating.
They give a nod to ABB's excellent execution during the "once in a lifetime broadband churn event" during the NBN rollout, where it grew market share from <1% to 6.4%, but note the limited scope for growth amid increased competition.
"The competitive landscape is changing. As organic growth rates slow, the possibility of industry M&A rises, as the scale is important to the sustainability of returns. In such an environment, ABB, in our view, could plausibly become a consolidator."
Airtasker Ltd (ASX: ART)
ART have developed and run an online platform that connects individuals and businesses wanting tasks performed with workers, and charges the former a booking fee for it.
Morgan Stanley initiate coverage of ART with an Underweight rating based on the fact it's yet to turn a profit combined with its likely need to raise funds.
"ART is not yet profitable and is FCF negative, utilising cash reserves to fund investment into its product and marketing. Continued investment is required given the competitive landscape. As a result, we believe that ART may need to undertake a capital raise in the future to continue funding its growth, which could be dilutive to existing shareholders."
Appen Ltd (ASX: APX)
APX leverage crowd-sourcing methods to generate and sell data to search engines, social media algorithms, and voice-operated technology predominantly for large global customers
Morgan Stanley have kicked off coverage with an Underweight rating, due largely to the fact APX is in an earnings downgrade cycle thanks to the pullback in digital advertising, mainly via Meta and Alphabet.
"The digital advertising backdrop is currently retracing, as 30% of 2Q digital ad results were weaker than expected...with ~60% of companies giving 3Q guidance guiding down ."
Couple that with an intensifying competitive landscape.
"As competition intensifies, and transfer learning reduces up-front project work requirements, we are less bullish on the revenue outlook and pricing power of APX."
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David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.
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David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.
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David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.
Expertise
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