As volatility grips the ASX, many tech shares have experienced notable ups and downs.
Market tremors are always a source of interest for investors, often quietly whispering to themselves, "What will I do next"?
Like a canoe floating down a river of rapids, sometimes it's good to follow the "big flows." With the downturn earlier this week, we've seen plenty of institutional money gushing into rather than out of global stock markets.
This is classic Warren Buffett stuff, when he said (emphasis added)– "be fearful when others are greedy and be greedy when others are fearful".
Let's see if now is the time to buy ASX tech shares.
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Hedge funds are 'buying the dip'
Market volatility can provide fantastic opportunities to capitalise on high-quality businesses that may be selling at short-term discounts.
So it's unsurprising to see the big end of town step in when the market drops a percentage point or three.
Goldman Sachs noted that hedge funds – high risk investment managers – bought the dip in tech shares this week.
The broker's analysis showed that these funds purchased mammoth sums of US stocks in the last two days, the largest in nearly half a year, according to The Australian Financial Review.
It is likely these investors were taking advantage of the lower prices on offer. Tech-heavy US stock indexes, like the NASDAQ-100 Index (NASDAQ: NDX), were up 25% this year right before things turned south.
The NASDAQ-100, or "Naz" as its often dubbed by traders, is now up just 9.3% in 2024 after yesterday's close.
Jonathan Caplis, CEO at PivotalPath, said that the sell-off was likely a knee-jerk reaction. Talking to the AFR, he noted:
Many hedge funds see a sell-off as a buying opportunity.
The majority of the managers we speak to are framing the current problems as short-term and sentiment-driven, versus a long-term issue with the fundamentals of listed businesses or even the wider economy.
The question is, what does this mean for ASX tech shares moving forward?
What ASX tech shares are in favour?
Whilst there are plenty of ASX tech share candidates to talk about, brokers are notably positive on three names – Xero Ltd (ASX: XRO), CAR Group Ltd (ASX: CAR), and Nextdc Ltd (ASX: NXT)
Xero, a cloud-based accounting software provider, is highly regarded for its growth potential. It is priced at $127.95 before the open on Wednesday.
Goldman Sachs is bullish on the company, highlighting its expansive total addressable market (TAM) and strong positioning within the global digitisation of SMBs.
The broker said Xero is positioned to "take advantage of the digitisation" of global businesses. In a July note, the broker said it sees "an attractive entry point into a global growth story," naming the ASX tech share its "preferred large-cap technology name".
It rates Xero a buy with a price target of $180, suggesting a potential upside of 40% from the current share price.
Consensus also rates Xero a buy, according to CommSec.
CAR Group and Nextdc in favour too
CAR Group is also rated a buy from Goldman. As a reminder, CAR is the operator of carsales.com.au.
Goldman likes CAR's "earnings momentum" and projects 14% earnings growth over the next three financial years.
It believes the shares are undervalued, with a $41.40 price target
"Following our US trip in late 2023 and CAR 1H24 result, we are increasingly confident in the earnings momentum. We forecast a 14% EPS CAGR across FY23-26, indicating that CAR Group shares are undervalued at current levels."
The broker has a buy rating on CAR Group shares with a price target of $41.40, a 26% upside potential from a price of $32.74 before market open on Wednesday.
Consensus also has a buy rating on the ASX tech share, CommSec data shows.
Meanwhile, Nextdc shares have been heavily sold in recent weeks. The stock is down 11.7% in the past month.
Tailwinds in artificial intelligence (AI) are expected to benefit the business. Goldman rates the stock a buy with a $19 price target.
Shares closed at $15.71 apiece on Tuesday, indicating around 21% upside potential from this mark. The ASX tech share is also rated as a 'strong buy' from the consensus of analyst estimates, per CommSec.
ASX tech shares takeout
The recent dip in ASX tech shares might present an attractive buying opportunity for long-term investors.
Data shows that hedge funds are certainly gobbling up the discounted shares. But with all investments, it's essential to consider the long-term versus short-term stock price movements.
Always remember to conduct your own due diligence and stick to your long-term goals.
