Some leading S&P/ASX 200 Index (ASX: XJO) tech shares have been hit heavily since the start of 2022.
A lower price doesn't necessarily make a business more attractive to look at. However, if these businesses are still growing their operations at an attractive rate, the lower valuation may be interesting for investors.
Here are two ASX 200 tech share contenders:
Image source: Getty Images
Xero Limited (ASX: XRO)
The Xero Limited share price has fallen by around 30% since the start of the calendar year.
Citi is one of the brokers that likes Xero at the moment, with a buy rating and a price target of $132.60. That suggests a potential upside of around 30%.
However, the broker points out the amount of new businesses being created in the UK and Australia is dropping, implying that Xero's supply of potential new clients is slowing. There are also more businesses closing down in those two countries.
Australia and the UK represent two of Xero's biggest markets. On 30 September 2021, Xero had 1.24 million Australian subscribers and 785,000 UK subscribers. Xero's global subscriber numbers have continued to rise – it reached three million (up 23%) in the first half of FY22.
The ASX 200 tech share is utilising its revenue growth and high gross profit margin (of more than 87%) to re-invest significantly back into the business. It's investing in both organic growth and acquisitions. For example, it recently acquired the LOCATE Inventory business, a US-cloud-based inventory management provider, to better support the inventory needs of small business and enhance its e-commerce capability.
Xero is embedding LOCATE's inventory and e-commerce talent and capability within Xero to enhance its inventory management offering. Management said this would help meet increased small business demand for inventory and cash flow management tools.
REA Group Limited (ASX: REA)
The REA Group share price has fallen by around 20% since the start of the 2022 calendar year.
It's the largest digital real estate portal business in Australia. Its operations include realestate.com.au, realcommercial.com.au, flatmates.com.au, Smartline Home Loans, Mortgage Choice, PropTrack, and Simpology.
The ASX 200 tech share also has a presence in Asia and North America. It has investments in property sites in India, China, the US, Malaysia, Singapore, Thailand, Vietnam, and Indonesia.
Morgan Stanley is one of the brokers that currently rates REA Group as a buy, with a price target of $178. That implies a potential upside of more than 30%. The broker is optimistic about the business and suggests it could buy a larger stake in Move to boost future growth.
The REA Group FY22 half-year result included double-digit growth with core earnings before interest, tax, depreciation, and amortisation (EBITDA) rising 27% to $368 million and net profit after tax (NPAT) going up 31% to $226 million.
As part of the HY22 report announcement, the ASX 200 tech share's trading update said residential property market conditions remained favourable. In January 2022, national residential new listings were up 14% year on year, with Sydney listings up 19%.
It's also targeting full-year 'positive jaws', excluding the impact of the REA India and Mortgage Choice acquisitions. In the second half, operating cost growth excluding acquisitions is expected to slow to high-single-digit growth.
