The Best ASX Technology Stocks

Marcus Tuck
Head of Research

6 am October 21, 2020

In February 2020 the ASX released its new S&P/ASX All Technology Index. It is designed to benchmark the performance of Australia’s fast-growing technology companies.

It includes not only the information technology sector, but also consumer electronics companies, internet and direct marketing retail companies, interactive media and services companies, and health care technology companies.

There are currently 58 stocks in the index, which is based on free float adjusted market capitalisation with a minimum liquidity requirement. The combined market capitalisation of all stocks in the index is over $140 billion.

The five largest stocks in the index by market capitalisation are Afterpay (APT), Xero (XRO), REA Group (REA), WiseTech Global (WTC) and SEEK (SEK).

The five smallest stocks are Atomos (AMS), NetLinkz (NET), Alcidion (ALC), PainChek (PCK) and ResApp Health (RAP), the last named having a market capitalisation below $100 million.

An exchange traded fund (ETF) designed to track the index already exists – the BetaShares Australian Technology ETF, listed under the ASX code ATEC. The existence of an ETF will help increase fund flows into the constituent stocks.

Impressive outperformance

Although the index was only launched in February this year, it has been calculated back to 21 March 2014. The outperformance of the index relative to the ASX 200 over that time can be seen in the chart below. The ASX All Technology Index has risen 172.2%, compared to a 15.9% rise for the ASX 200 Index (not including dividends).

Source: Bloomberg, The Super Investor

Screening the All Technology Index

Companies in the index are at various stages of development and vary greatly in quality. Some are pre-profit and some even have little or no revenue (e.g. Brainchip).

Using EV/Sales as a metric for screening, two stocks stand out as having an EV/Sales ratio below 1 based on reported sales for the last 12 months. They are Data#3 (DTL) and Dicker Data (DDR). However, both companies have low EBITDA margins below 5%, so a check for sufficient free cash flow generation is required.

Our preferred screening method focuses on free cash flow yield, with certain growth and safety measures incorporated. Specifically, we have used Bloomberg to screen the ASX All Technology universe for stocks that have the following characteristics:

  • Free cash flow yield >= 3.5%
  • Forecast EPS CAGR >= 10% for next 3 years
  • No FY21 EPS downgrade over last 3 months
  • Share price above 50, 100 and 200 day moving averages
  • Net debt < Shareholders equity

The forward-looking measures use Bloomberg consensus forecasts. The stocks that met those criteria can be seen in the table below, ranked in descending order of free cash flow yield.

Source: Bloomberg, The Super Investor

Disclosure: The author owns HSN shares.

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