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4 top ASX-listed technology stocks

Nicki Bourlioufas  |  20 May 2016Text size  Decrease  Increase  |  

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

 

REA Group (REA) and SEEK Limited (SEK) have outperformed the S&P/ASX 200 over the past year, and newer technology stocks WiseTech Global (WTC) and Aconex (ACX) have also performed well, representing the strong growth potential of technology shares, though investors may have to pay a relatively high price for their strong performance.

According to Morningstar senior equities analyst Gareth James, technology shares which can establish an advantage over competitors often deliver very strong growth. Over the past year, REA Group is up around 32 per cent (as at 18 May), compared to the S&P/ASX 200, which is down almost 5 per cent. SEEK has gained around 6 per cent.

Business management software company Aconex is up a massive 132 per cent. Another business software provider, WiseTech Global, which sells software to the logistics and freight forwarding industry, is up around 40 per cent since it floated at $3.35 a share on the ASX in April.

Just over 18 per cent of the company was sold to the public and fund managers, with founder and CEO Richard White retaining a 50 per cent stake in the business.

James says companies such as these have strong competitive advantages because they have what Morningstar labels a "network effect," that is, people have to use their services because they have the marketplace.

REA is Australia's leading property advertiser while SEEK is dominant in the employment classifieds market. Both companies have dominated their industries for years and have taken advantage of advertisements moving from print to online.

"Both SEEK and REA were sold off at the beginning of the year but now, following the interest-rate cut and, more importantly, given underlying themes that these businesses are very good quality and have great long-term growth prospects given their competitive advantages, this has pushed them higher," James says.

James puts a fair value of $45 on REA compared to its current price at around $55, while SEEK has a fair value of $13 compared to its current price at just over $16.

"Our valuation assumes a lower earnings growth rate that the market price implies and there is a question of how much extra interest shareholders should pay. We've made a call on that and think they are a little bit overvalued compared to where they should be," he says.

As for WiseTech and Aconex, they enjoy both a network effect and high switching costs keep their customers from going to competitors.

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