3 ASX tech shares that risk going up in flames, and 1 sturdy stock I'd buy instead

Now is the time to pay attention to fundamentals to avoid investing in a dud…

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The tech sector is the worst-performing of the ASX share market so far in 2022. For some, the temptation might be to go on a spending spree. However, not all ASX tech shares are equal in this environment.

I'm generally an optimist — though, I think it is times like now that demand a more measured approach to the market. Don't get me wrong — I believe there are tremendous opportunities right now… more on that later.

Even so, there's a possibility that some of the companies we know today may not be around several years from now. The best-case scenario is a handful of listed names use their capital inefficiently and destroy shareholder value.

As the cost of capital increases and consumer demand wanes, assessing the fundamentals of an investment is more critical than ever.

Below are three ASX tech shares I believe could be on unstable foundations.

Is it risky business?

I want to say upfront that these ASX tech shares could prove to be more robust than first thought.

There are multiple levers that can be pulled by their management teams to better position the company, including raising capital, renegotiating loan facilities, etc. Nonetheless, this is a snapshot of three companies that hold objectively poor fundamentals at present.

The first mention goes to the software-defined network provider, Megaport Ltd (ASX: MP1). Although the ASX tech share has been able to grow its revenue by 39% year-on-year, it remains severely unprofitable. For the 12 months ending 30 June 2022, Megaport posted a loss of $48.5 million from $109 million in revenue.

In addition, the company's balance sheet has witnessed a significant decrease in cash — $136.7 million to $83 million — in FY22. At the same time, Megaport's debt has nearly doubled.

Next on the list is the former high-flying installment payment platform, Sezzle Inc (ASX: SZL). The main concern I hold with Sezzle is its debt-heavy balance sheet. While the company can attest to holding US$57.9 million in cash equivalents, this is offset by US$53.9 million in debt — bringing net cash down to around US$4 million.

Holding a lot of consumer debt heading into potentially harder economic conditions poses a risk to Sezzle. Higher instances of bad debts could add further financial strain to Sezzle's already precarious position.

Likewise, Openpay Group Ltd (ASX: OPY) is another buy now, pay later provider that appears to be in rough shape. Not only have losses continued to widen over the years — now at $82.5 million — the company's balance sheet is in a net debt position, otherwise known as negative equity.

I prefer this ASX tech share to buy

If I had to pick one ASX tech share that has the best chance of staying afloat in turbulent times, it would likely be Objective Corporation Limited (ASX: OCL). The fundamentals of this 35-year-old business are hard to ignore.

Notably, Objective Corp is wildly profitable — parading a net profit margin of 18% in FY22. This compounding money printer has enabled the company to build a fortress-like balance sheet over the years. As a result, it holds no debt and $44 million in cash equivalents.

I believe this company is especially well suited to difficult times due to its substantial government customer base. Providing a range of essential systems spanning record management, licensing compliance, and more, Objective's revenue is relatively defensive.

At a price-to-earnings (P/E) ratio of 76 times, Objective might seem priced at a premium. However, as Warren Buffett has said, "Price is what you pay. Value is what you get."

A company of this calibre, in my opinion, represents value at its current price.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended MEGAPORT FPO and Objective Corporation Limited. The Motley Fool Australia has recommended MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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