3 'compelling' ASX tech shares cheap enough to buy now

And two small-cap technology stocks this CIO says he wouldn't touch with a barge pole.

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If you own ASX technology shares, then you don't need to be reminded how painful the past 17 months have been.

Upward pressure on interest rates has seen investors flee from growth stocks, which dominate the tech sector.

In fact, despite a rally this year, the S&P/ASX All Technology Index (ASX: XTX) is still down more than 30% since November 2021.

Among these, businesses with smaller market capitalisations have suffered even more.

But Datt Capital chief investment officer Emanuel Datt reckons "valuations are beginning to look attractive" for these types of shares. 

"Small caps present many compelling reasons for investing," he said.

"These include access to earlier-stage, higher-growth businesses, a broader range of sector opportunities to pick from and an ability to more easily back future trends."

Three cheapie small-caps to consider

For Datt, a recent phenomenon points to a possible revival in small-cap tech stocks.

That's the rise of generative artificial intelligence from the sudden entry of ChatGPT and GPT-4 into the zeitgeist.

"Artificial Intelligence or AI adoption is on the front burner for many small-cap tech focused companies," he said.

"We view this environment becoming more crowded and highly competitive."

Perhaps the most obvious ASX tech stock to benefit could be AI data provider Appen Ltd (ASX: APX).

"Appen… has experienced significant downward pressure on the share price at the same time as AI has catapulted into mainstream consciousness via the launch of OpenAI's ChatGPT," said Datt.

"ChatGPT has transformed AI from a vague and remote concept to a readily accessible real-world experience in a matter of months."

Intellihr Ltd (ASX: IHR), which employs AI for its human resources software, has also struggled with a falling share price.

Datt noted that it's "become the subject of merger and acquisition activity".

"The maker of AI based avatars that converse in real time with any audience is currently the subject [of] a takeover offer from Humanforce Holdings Pty Ltd, after experiencing a share price slide of around 75% last year."

Higher interest rates have hit companies like Bravura Solutions Ltd (ASX: BVS) pretty hard, according to Datt.

"Bravura Solutions lost more than 50% of its market value in calendar 2022," he said.

"Technology companies are also coping with higher cost inputs because of an inflationary environment impacting further development. They have been always particularly vulnerable to rising interest rates, which drive up the present-day cost of investing in future earnings."

Two ASX tech stocks that are just torching cash

On the other side of the coin, there are technology stocks that are also heavily discounted but Datt wouldn't go anywhere near.

"High cash-burn business models that have questionable sustainability, in our view, include call recording company Dubber Corp Ltd (ASX: DUB) and cloud based communications provider Whispir Ltd (ASX: WSP)."

The Dubber share price has lost a shocking 86% over the past year, while Whispir has fallen 82%.

Motley Fool contributor Tony Yoo 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 Appen, Bravura Solutions, Dubber, and Whispir. The Motley Fool Australia has positions in and has recommended Bravura Solutions. The Motley Fool Australia has recommended Whispir. 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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