Gareth James: The American market obviously has the largest technology stocks in the world and technology stocks comprise around 30 per cent of the U.S. market. In Australia, it's much more less. So, technology stocks are only about 3 per cent of the Australian market. And in Australia, the technology stocks tend to be much smaller companies as well. So, most of them have a market capitalisation of less than about $100 million. So, there's only a relatively small number of technology stocks on the ASX. But there are a number of stocks which we believe have sustainable competitive advantages or economic moats. So, a few that we think are undervalued at the moment include TechnologyOne which is a provider of ERP or enterprise resource planning software, MYOB which provides accounting software for small businesses and also, Link which provides services to superannuation funds and also share registry services.

Technology stocks can be quite difficult to value because very often they have huge potential earnings growth and that means that the market is constantly trying to guess whether they are going to actually achieve that earnings growth or maybe they won't achieve it. So, very often technology stocks can look expensive.

That's been particularly the case over the last few years because the market has generally speaking been in a bull market since the GFC in 2009 and technology stocks tend to have a beta which means that they tend to go up more than the market when the market is rising or fall more than the market when the market is falling. So, over the last few years, we have seen a lot of tech stocks perform particularly strongly and that can mean that their valuations can look very expensive.

So, we think that's the case for a number of technology stocks, particularly certain stocks which are very much in vogue at the moment. So, the likes of WiseTech Global or XERO or Netwealth, those three stocks look particularly expensive to us. The implied earnings growth looks extremely challenging for those three companies. So, we do think those stocks are a bit overvalued, but we do think there are other stocks which have kind of fallen out favor a bit which do offer better value.

MYOB dominates the accountings software sector in Australia. It's actually more of a duopoly between MYOB and XERO. MYOB have been around for a lot longer than XERO and kind of less in vogue than XERO at the moment. XERO was a disruptor of the sector. It came out a few years ago with its cloud software and MYOB have had to catch up to a certain extent. But we think that a lot of investors are overlooking MYOB in favor of XERO. XERO has got global growth potential whereas MYOB is much more focused on Australia and New Zealand. But we still think that MYOB has good earnings growth potential in Australia and New Zealand and importantly, the company is already profitable whereas XERO isn't profitable yet. And MYOB trades on a much more reasonable earnings multiple or P/E ratio.

TechnologyOne has an extremely good track record with regards to its financial performance. So, it's grown earnings per share pretty consistently in recent years at a rate of about 15% per year which is extremely impressive. The business tends to be capital light, which means that the company doesn't have to invest much money to generate the profits that it generates. And that means that the company can pay out dividends, regular fully franked, dividends and also that it doesn't have any debt on its balance sheet. So, there's a number of attractive aspects there. TechnologyOne's customers as well are extremely sticky.

So, their customer base includes local counsels and universities largely, which are organisations which are very stable businesses. And once TechnologyOne's software is installed in these organizations, very rarely is it replaced by a competing software. In fact, over the last 30 years, TechnologyOne has virtually never lost a client to a competitor. So, it's extremely attractive business. The company at the moment is going through a bit of a transition where it's going from selling desktop software to cloud-based software and we think that that's going to boost revenue. One of the problems that the stock has faced in recent months is that it's reported slightly slower growth and that means that the market has reduced the P/E ratio on the stock effectively which has resulted in a share price fall. But we think that the company is going to keep growing. It's given guidance, (CPS) growth guidance, for this coming year of between 10% and 15% again. So, we think that there's still more growth to come with TechnologyOne.