The tech sector has been a great place to invest over the last 12 months.
For example, during this time, the S&P ASX All Technology index has delivered an impressive 32% return.
This is approximately four times greater than the return of the ASX 200 index over the same period.
The good news is that Bell Potter remains very positive on the outlook for this side of the market in FY 2025. It commented:
We have a positive or constructive view on the outlook for the tech sector given interest rates both domestically and internationally have stabilised and cuts look likely to start in the not-too-distant future if they have not already. A falling interest rate environment is positive for the tech sector which typically has high growth stocks with low or negative cash flows/earnings now and only reasonable or meaningful cash flows/earnings in several years' time.
We note there has already been a strong rally in tech stocks offshore in anticipation of interest rate cuts – the NASDAQ is at an all-time high – but there has not been anywhere near as strong a rally in Australia. We therefore believe a rally in tech stocks domestically is overdue and is likely to be led by large caps with the mid and small caps to eventually follow.
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Which ASX tech stocks should you buy?
Bell Potter has picked out three ASX tech stocks that it is bullish on for the year ahead.
They are Gentrack Group Ltd (ASX: GTK), REA Group Ltd (ASX: REA), and TechnologyOne Ltd (ASX: TNE).
In respect to billing technology company Gentrack, its analysts believe its recurring revenue and long-term growth opportunity make it a buy. The broker has a buy rating and $10.90 price target on its shares. It said:
GTK generates 85% of its revenue (majority recurring) from its specialised energy/ water utilities enterprise billing/CRM (customer relationship management) platforms and is leveraged to future-facing distributed energy and decentralised storage trends, which have coincided with significant tech debt within legacy solutions. Although it appears expensive at c.40x FY24 and c.30x FY25 EV/EBITDA multiples, we believe the valuation is justified with a long and visible opportunity for revenue growth, as well as margin expansion following investment in headcount to deliver on its pipeline of deployments and integrations in addition to geographic expansion into Asia and EMEA.
Bell Potter has a $203.00 price target on realestate.com.au owner REA Group. It likes the company due to its strong medium and long term growth prospects. It explains:
We remain positive on REA's medium and long-term prospects through the cycle with a free cash flow profile able to sustain materially higher capex for platform development compared to its nearest competitor, as well as encouraging early signs for penetration in the fledgling-yet-substantial Indian residential property listings market.
Finally, enterprise software provider TechnologyOne could be another ASX tech stock to consider in FY 2025. The broker has a buy rating and $20.25 price target on its shares. It believes another re-rating to higher multiples is possible thanks to its strong growth outlook. Bell Potter commented:
A key strength of the company is the software is now almost purely delivered on a SaaS basis (i.e. software-as-a-service) which is the same as companies like WiseTech (WTC) and Xero (XRO). The advantage of this delivery model is it generates recurring revenue for the company and makes the earnings very predictable. The shift to SaaS and the visibility of earnings has driven a re-rating in the PE ratio of the stock from c.30x a few years ago to c.40x now. We believe this re-rating will continue and think a PE of c.50x is ultimately achievable.
