S&P/ASX 200 Index (ASX: XJO) tech shares could be leading opportunities to buy at their current prices, according to the broker Morgans.
Since November 2021, there has been plenty of volatility on the ASX for the tech sector. Interest rates and inflation are having a significant impact on valuations. Interest rates pull down on asset prices like gravity – the higher the interest rate, the lower the asset price is expected to be.
The Reserve Bank of Australia (RBA) recently implemented its tenth consecutive interest rate increase to 3.6%, with further tightening flagged. But Morgans said the interest rate is getting closer to its top. Once that is reached, the broker expects “quality technology and classified names to once again shine”.
Hence, with some businesses trading at lower prices, experts at Morgans have identified three of their tech favourites.
High-quality ASX 200 tech share choices
Morgans explained that its current preference right now is for the high-quality names of Xero Limited (ASX: XRO), REA Group Limited (ASX: REA), and SEEK Limited (ASX: SEK).
In the recent reporting season, both SEEK and REA Group announced their results. Let’s start with SEEK.
Morgans noted that SEEK beat the expectations of analysts. The broker pointed out that SEEK grew revenue by 21% year over year, while earnings before interest, tax, depreciation and amortisation (EBITDA) went up 13% year over year.
The broker said that SEEK benefited from “strong volume growth”, with underlying structural tailwinds continuing. However, Morgans is expecting “normalisation” in the second half of FY23.
Yield growth helped again to offset costs, with recent price rises rolling through. Platform ‘unification’ spending is impacting margins in the short term.
Morgans also said that SEEK Asia “performed well” with the company “beginning to extrapolate early benefits from the unified platform”.
Looking at REA Group, Morgans called the result “resilient” with 5% revenue growth, though EBITDA was “marginally down” by 2%. Group EBITDA margin fell by around 100 basis points (1%).
The broker commented that yield growth of 11% year over year was a “key driver” of the ASX 200 tech share’s revenue growth, while depth penetration remains “strong”. However, there is a “cautious outlook” for new listings growth over the rest of the year. It’s expecting volatility to continue, with a possible decline of around 10% in the second half of FY23.
Morgans said that expenses are in focus, with the EBITDA margin impacted by higher costs, such as the investment in REA India.
Xero has a different reporting schedule. But, the company has just revealed that it’s going to cut 700 to 800 roles globally and streamline its business.
The ASX 200 tech share is now balancing growth and profitability, while “taking a robust approach to capital allocation that supports long-term value creation”.
Xero’s management is now targeting an operating expense ratio in FY24 of around 75%, with an improvement from between 80% to 85% in FY23.
In other words, the business is expecting to significantly increase its profit margins in the next 12 to 18 months.
