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2 tech stock standouts in an overvalued market

Emma Rapaport  |  24 May 2018Text size  Decrease  Increase  |  
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It’s no secret that analysts think the Australian stock market is wildly overvalued.

Around 44 per cent of respondents believe the Australian Securities Exchange is up to 10 per cent overvalued, according to an audience poll at yesterday's Morningstar Investment Conference.

This is supported by the portion of Morningstar's positive recommendations falling from 20 per cent of coverage at the end of 2016, to 12 per cent of coverage today. However, this doesn’t mean value isn’t there for those who search for it.

Senior technology equities analyst Gareth James says while he sees a lot of overvaluation and risk in the tech sector, that some stocks considered 'old tech' have been left behind.

"The challenge is finding good tech stocks," James says. There's about 200 of them on the ASX and about 150 of them have a market cap of less than $100m – so generally speaking we tend to find ASX listed tech stocks are pretty risky.

"The way we tend to think about it we focus on larger tech stocks with economic moats."

MYOB undervalued in the shadow of Xero

News of the competition watchdog’s decision to put MYOB’s (ASX: MYO) $180 million acquisition of Reckon's accounting practice (ASX: RKN) into doubt hasn’t shaken analysts' valuation of the stock, which they continue to rate as significantly undervalued.

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“The transaction isn't hugely material to MYOB, as it represents just 10 per cent of MYOB's current market capitalisation," James said.

"Although the acquisition offers strategic benefits to MYOB, we don't consider it to be materially value-accretive."

Instead, analysts take a long-term view of the narrow economic moat stock, noting that while the they're still very much in the shadow of Xero, "a sexier accounting software company", that the decision to keep their focus local will reward them in the long run.

"In what's become a two-horse race between Xero and MYOB, it's not really about the quality of the software anymore, which is pretty similar from one frim to the next, or the distribution model," James said.
"The big difference however is that Xero is trying to build a global platform which could be viewed as a much riskier strategy, especially in the tough market US where they'll go up against major rival Intuit, while MYOB is continuing to focus on the Australian market."
"MYBO is going much deeper with their Australian client base – trying to monetise them more and more with a transition from desktop to cloud-based accounting software products over the next decade."

TechnologyOne

Morningstar analysts have cut their fair value estimate for narrow-moat-rated Technology One (ASX: TNE) by 5 per cent to $5.70 per share following a weaker-than-expected first-half result. However, at the current market price of $4.65 per share, analysts still believe the stock is undervalued.

"Technology One has an incredible track record, extremely sticky software, and a client base which is very stable, but it's seen as being a bit 'old tech'. However, we think it's undervalued in the current market," James says.

"There are a few concerns surrounding the company's mid-year results, which the market reacted negatively to, but we see the as a great opportunity to purchase the stock at attractive levels."

Responding to concerns around culture, James said that while he's read media articles accusing the company of bullying, that he has personally visited their Brisbane offices and think the problems are been overstated. "All companies have these types of cultural issues from time to time," James says.

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Emma Rapaport is a reporter with Morningstar, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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