Tech still priced for a future that may never come

As the market separates technology stocks into AI winners and potential losers, some of yesterday’s more aggressive valuations are receiving a reality check.

This has driven a brutal bear market across ASX technology names for the past seven months. The S&P/ASX All Technology Index (XTX) has corrected by approximately 35% falling from near-record highs of ~4,319 in early October 2025, to 2,776 today.

Some of the sector’s largest and most widely owned names have led the decline. Xero (ASX:XRO), WiseTech Global (ASX:WTC), REA Group (ASX:REA), Pro Medicus (ASX:PME), Seek (ASX:SEK), and Life 360 (ASX:360) have all suffered sharp falls, with several down more than 50% from their recent highs.

For FiveRock, this reinforces a core investment principle: valuation discipline matters. In markets where long-term forecasts are being questioned, we believe investors are better served by reliable, time-tested valuation methods grounded in observable earnings.

In this article, we argue that simple price-to-earnings multiples (PE’s) deserve renewed attention. We also highlight one high-quality ASX-listed technology company that appears exceptionally cheap on this basis, with a PE of just 11. 

Why ASX tech is falling while US tech soars

The weakness in ASX technology stocks stands in sharp contrast to the United States, where the technology-heavy NASDAQ 100 Index is up 19% over the same timeframe and is trading at record highs.

That performance has been driven by an array of tech giants positioned to monetise the AI boom, such as Alphabet, Nvidia, Amazon and Broadcom. These companies are either building the infrastructure required for AI adoption, embedding AI into scaled platforms, or controlling distribution channels that may benefit from the next wave of enterprise and consumer technology spending.

The ASX technology sector looks very different.

The local market has a heavier concentration of software and platform businesses. Many of these companies have historically been valued on the assumption of long-duration revenue growth, high customer retention and expanding margins.

AI has challenged that framework.

The concern is not that these businesses become obsolete overnight. Many provide valuable, deeply embedded products. The issue is that AI may lower software development costs, reduce barriers to entry, increase pricing pressure, and make some customers question whether they need to keep paying premium prices for services that may become easier to replicate.

That uncertainty is now being reflected in share prices.

Why Terminal Value is being reassessed

The core issue is whether the long-dated valuation assumptions traditionally used to justify premium technology multiples still carry the same weight.

For many software businesses, professional analysts have relied heavily on discounted cash flow (DCF) models. These models are highly sensitive to assumptions about revenue growth, margins, competition, and reinvestment many years into the future.

The most important component is often the terminal value. This estimates the value of all cash flows beyond the explicit forecast period, which is usually where detailed annual forecasts stop. In many DCF models, terminal value can account for the majority of the total valuation.

That is where AI creates a problem.

If investors become less confident that a company’s revenue base, pricing power or margin structure will remain intact over the long term, then the terminal value becomes much harder to defend. This does not mean the business is impaired today. It means the market is less willing to capitalise distant earnings with the same confidence it once did.

As a result, we expect analysts and investors to place greater emphasis on short- and medium-term earnings multiples. That shift may not be complete. Many ASX technology stocks still trade on elevated PE multiples by broader market standards, even after substantial share price falls.

Livewire’s Carl Capolingua recently captured this dynamic well, noting that new AI coding tools have triggered a reassessment of the threat to incumbent software companies, including from lower-cost start-ups, margin pressure and customers potentially building solutions themselves:

“New AI coding tools that materially reduce software development costs have triggered a major rethink about the threat posed to incumbent businesses from startups or via price-cutting that reduces margins. Also, consider that if building software is cheaper and easier, customers might simply choose to do it themselves. What followed was a sell-off finance journalists have coined the SaaSpocalypse – a rout that, at its worst, wiped as much as 60% from the share prices of stocks whose underlying earnings had barely changed.”

It’s a good wire worth reading in full, and Carl finished by asking whether today's beaten-down multiples reflect a new rational baseline or if they are simply an overcorrection ahead of greater AI clarity.

Xero still on a premium multiple

Xero is a useful example. Its software is mission-critical for many small to medium enterprises, it has a strong brand and its pricing remains modest relative to the value it provides customers.

However, as investors consider the potential that Xero could face new AI driven competition, investors are increasingly questioning how durable Xero’s moat will be over the next decade. That does not mean Xero’s earnings are under immediate threat. It does mean investors may be less willing to place a high value on profits forecast many years into the future.

This is particularly relevant for DCF models that attempt to capture earnings 10 or 15 years from now. In a pre-AI environment, valuing a high-quality software company on long-dated cash flows may have seemed reasonable. Today, those assumptions require greater scrutiny.

That is why shorter-dated earnings multiples are becoming more relevant.

A price-to-earnings multiple is not a perfect valuation tool, but it is transparent, comparable, and grounded in observable earnings. It forces investors to ask a practical question: how much are we paying for the profits this business is expected to generate over the next few years?

On that basis, Xero still looks expensive. Even after a substantial share price fall, the stock continues to trade on a high forward PE multiple, leaving limited room for disappointment if growth slows, margins disappoint, or competitive intensity increases.

A Saaspocalypse-proof tech stock trading on a PE of 11

Quality technology companies can still deserve premium valuations.

The best of them often have loyal customers, expanding addressable markets, low capital requirements, strong cash generation and the ability to increase prices over time. These are valuable attributes, particularly in a market where many businesses are struggling to grow without consuming significant capital.

One ASX-listed technology company we believe retains many of these characteristics, while trading on a far more reasonable valuation is Jumbo Interactive (ASX:JIN).

Jumbo is a provider of online lottery technology. In Australia, the company has carved out a focused position through nimble digital marketing and an emphasis on differentiated user experience. It is also founder-backed, conservatively managed, and has generated strong cash flows over a long period.

The valuation now looks undemanding. While Jumbo has previously commanded a premium multiple, the stock is currently trading on around 11x earnings. In our view, that multiple provides a more sensible balance between quality, risk and return than many other ASX-listed technology names.

There are, of course, notable risks.

The most important is Jumbo’s dependence on its reseller agreement with The Lottery Corporation, which runs through to 2030. With The Lottery Corporation under new leadership and focused on growing its own digital capability, the market has reassessed the long-term earnings runway in Jumbo’s core Australian business.

We are cognisant of that risk. However, the current valuation appears to reflect a conservative view of the core business while offering limited credit for Jumbo’s offshore growth options.

The company is investing to expand its presence in the United Kingdom and United States, supported by recent acquisitions. While these markets remain earlier-stage opportunities, they provide potential avenues for growth beyond the Australian reseller agreement.

Jumbo also continues to innovate within its existing ecosystem, developing products and capabilities that may improve customer engagement and create additional value from its established platform.

The lottery sector has also endured a difficult period of jackpot activity. Jumbo is particularly exposed to this cycle because its customer base skews younger and more online, where activity tends to be more responsive to large jackpots. Any normalisation in jackpot activity should therefore provide a more supportive trading environment.

In a fragile consumer backdrop, that matters. Lotteries are not immune to household pressure, but the category has historically shown more resilience than many discretionary sectors. For Jumbo, the combination of a low earnings multiple, strong cash generation and offshore optionality makes the risk-reward equation increasingly compelling.

Keep it simple while the sector has its AI reality check

The ASX technology sell-off over the past several months is a reminder that valuations built on distant assumptions can be fragile.

For many years, high-quality technology companies were rewarded for long growth runways, scalable margins and the prospect of materially higher earnings well into the future. That framework worked while investors had confidence in the durability of those assumptions.

AI has made that confidence harder to sustain. As the market reassesses the long-term competitive position of software and platform businesses, investors are likely to place more weight on current earnings, near-term cash flows and valuation discipline. In that environment, many former market darlings may still look expensive, even after large share price falls.

Against this backdrop, Jumbo Interactive stands out. It is a founder-backed, cash-generative technology business trading on around ~11x earnings with genuine growth optionality offshore.

In a market still digesting its AI reality check, that kind of valuation clarity is increasingly rare.