ASX tech shares had a terrible time in 2022 amid numerous interest rate rises. After such a bad run, can the sector regain investor confidence in 2023?
As an example of the heavy decline, the BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC) fell by around 32% last year. This is an exchange-traded fund (ETF) that is invested in around 50 ASX tech shares, ranging from large players like Xero Limited (ASX: XRO), WiseTech Global Ltd (ASX: WTC) and REA Group Limited (ASX: REA), down to small technology companies like Frontier Digital Ventures Ltd (ASX: FDV) and FINEOS Corporation Holdings PLC (ASX: FCL).
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Could 2023 go much better?
According to reporting by the Australian Financial Review, a survey of 11 of the country's leading technology CEOs by the newspaper showed that most of them believe the sales cycle slowdown which is currently hurting Europe and the US could also hurt Australian companies as well, though the 'business to business' (B2B) market could do better than ones that focus on consumers.
WiseTech CEO and founder Richard White said:
Regardless of geography, tight economies force business leaders to focus on efficiency in order to be resilient and maintain margins.
The top performing ASX tech companies are mostly B2B players, so they are in a better position compared with other markets in which many of the top tech companies are consumer-facing businesses and so more vulnerable to consumer spending trends.
[This year] has reminded the tech sector we should all have an ongoing focus on efficiency and profitability as part of good financial discipline. We implemented an organisation-wide efficiency program a couple of years ago … it's given us an annualised cost reduction of approximately $50 million, which was important for driving further operational leverage as our revenue continues to grow.
I suspect investors will be unlikely to quickly return to the days when growth was the chief metric of business health for a tech company. Growth at any cost is pretty much dead, and I expect a focus on growth and profitability is here to stay.
My take on ASX tech shares
The technology sector is a diverse group and, while they have largely been sold off indiscriminately, I think there could be a good rebound for some names.
Remember, a share price is meant to reflect the entire future value of a business, discounted back to a valuation for today.
I do not think that the underlying value of some businesses are worth 40% less, 50% less or an even bigger discount, compared to 12 months ago. However, I'd also say that some businesses were not worth as much as how high the market had pushed them.
If the market sees that some ASX tech shares' financials are holding up better than others, this could lead to a boost for names like that. Remember, if something drops by 50% from $100 to $50, it only needs to go to $75 to make a 50% return.
I can see names like Megaport Ltd (ASX: MP1), Xero Limited (ASX: XRO) and Life360 Inc (ASX: 360) being candidates that could rebound because of how hard they've been hit, yet revenue has continued to grow.
Over the long term, some of the names in this sector could be the ones that develop the most, with strong operating margins. So, being able to buy these ASX tech shares at much cheaper prices seems like a great opportunity to me.
Even if technology businesses don't rebound in 2023, over the next three to five years, I think they could be among the better performers.
