Many ASX technology shares have taken a beating over the last few months. Here’s why I think it could be worth looking at shares of Speedcast International Ltd (ASX: SDA), Nearmap Ltd (ASX: NEA) and Appen Ltd (ASX: APX).
Why It Pays To Consider ASX Technology Shares
When you look around you, chances are the products and services you use most each day are built using the latest technology.
Sure, spotting the companies which make these products and services a reality for everyday consumers and businesses long before other investors can be risky. However, if you are a shrewd long-term investor, put in the work to understand the businesses and products, and then diversify your holdings across many companies, the benefits of being a long-term investor in technology shares can be terrific.
Like most businesses, the best kind of tech businesses tend to be those that offer a product or service which deeply embeds itself in the customer’s life/business. Think about your favourite email provider, document software or your workplace’s software system. How hard would it be to remove it?
For the technology companies and their clients, these products and services can be very ‘sticky’ and generate high amounts of recurring revenue, making their returns more predictable for analysts and investors. What’s more, thanks to the benefits of scale and cost advantages, good technology businesses can go on to generate very high profit margins (e.g. gross profit, EBITDA, EBIT and so on). The following Rask Finance video explains EBITDA in detail:
Below, I’ve listed three ASX technology companies that have recently fallen out of favour. Are they cheap?
1. Speedcast International Ltd
Speedcast International is a satellite services company with operations stretching from Brisbane around to Perth. Ships, mining companies, government groups and other parties can use their services for communication.
The Speedcast share price began declining in July when the company released updated guidance for 1H19 and FY19. Several setbacks, including weaker market conditions and technical difficulties, led Speedcast to lower FY19 EBITDA guidance from a range of US$160 million to US$171 million, to a range of US$140 million to US$150 million.
Underlying EBITDA in 1H19 only amounted to $66.8 million and the company reported a net loss of $5.6 million. While results have been discouraging, the Speedcast share price has fallen more than 67% in the last six months. The question is whether that is an overreaction or whether it is justified by the outlook. Either way, Speedcast may be a company worth looking into.
2. Nearmap Ltd
Nearmap is a leader of aerial imagery technology and location data, providing frequently-updated, high-resolution aerial imagery. It currently operates in Australia, New Zealand and the United States. It’s one of the ten largest aerial survey companies in the world by annual data collection volume.
Nearmap shares have fallen more than 36% over the last three months but they remain nearly 75% higher than they were in January. Nearmap shares peaked in June and the decline accelerated following the company’s FY19 preliminary results in July. These results showed record growth in annualised contract value (ACV) and cash flow breakeven in line with FY19 guidance. Statutory revenue increased 45% while EBITDA was up 216% to $15.5 million.
Despite the positive results and outlook, shareholders were expecting more. From a high of $4.29, shares now trade at around $2.60 per share.
3. Appen Ltd
Appen provides data for machine learning and artificial intelligence. Basically, it provides and improves data for the development of artificial intelligence and machine learning products. With more than 20 years of experience in over 130 countries, Appen has firmly established itself as a global leader in this space.
Appen shares have been hit only in the last three months, down 22%. Year-to-date, shares remain around 71% higher. Appen is another example of a company that has ended up a victim of high expectations.
In 1H19, revenue grew by 60%, while statutory EBITDA was up 48%. EBITDA margins improved and net profit after tax (NPAT) increased by 33%. Even with very high growth, Appen shares were pressured by an even higher valuation which demanded more. After the share price decline, Appen shares still trade on a price-earnings (P/E) multiple of around 51 times.
Buy, Hold Or Sell?
These three companies, particularly Nearmap and Appen, are examples of what can happen when investors senselessly push a valuation higher and higher to levels that are unsustainable. At these valuations, even a great annual report can see the share price tumble. Valuations like these do not benefit anyone in the long-term and only serve to create volatility in the market.
Following the share price declines, I’m still not a buyer at today’s prices, although I’ll be keeping a close eye on Nearmap and Appen for future buying opportunities.
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Disclosure: At the time of publishing, Max does not have a financial interest in any of the companies mentioned.