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Date : 14/10/2020

Top ASX Tech Stocks to Buy


The Technology sector has performed the best during the covid19 crisis – so much so that tech stocks have divided opinions. Few experts call it a bubble, while others see rationale behind sky-high valuations. Be it small cap or large cap, tech stocks have surged. The reason is pretty simple. The pandemic induced financial crisis is very different to the financial crisis of the past.

The general theme around global markets is that capital intensive and debt heavy businesses have been punished. While most tech companies are capital light businesses with flexible business models, they have thrived. They were also better equipped to handle the restrictions that came with the pandemic since they were already offering their services digitally.

ASX is home to quite a few tech stocks that have a global presence. As we move closer towards a digital economy, these ASX tech stocks are gaining more market share and as investors it is critical now to add them in our portfolios to better align it for growth. After all, the highest growth in markets will be driven by the technology sector in the future.

Below, we will dwell into the best tech stocks on the ASX that have performed well during the crisis and those that we hold in our portfolios.

Afterpay Limited (ASX: APT)

Afterpay is the largest player in the high growth buy-now-pay-later (BNPL) space. Having taken the Australia and New Zealand market by storm, Afterpay has now had a growing presence in the USA, Canada, UK, and is now entering the European Union.

The stock has rallied 228% this year. The stock now trades at an all time high following AUSTRAC’s audit confirming that Afterpay is compliant with “Anti-Money Laundering and Counter-Terrorism Financing Act, 2006”.

In addition to the first mover advantage the firm has as it enters unchartered territories, it has very smartly taken on mergers and acquisitions to enter new markets. Acquisitions have added synergies such as existing users and lower customer acquisition costs. Afterpay has consistently shown a high user and merchant growth rate. This increases the total volume of transactions, which becomes extremely important in an industry characterised by low margins. In addition to strong performance, Afterpay is in a very flexible position financially – with low debt levels. Consumer behaviour changes have fuelled growth and will continue to do so. As the competition heats up in the BNPL sector, a global dominator such as Afterpay offers the best risk-reward ratio.

The “where to next?” question is pretty clear for Afterpay. We expect the firm to gain market share in the USA and Europe. Growth prospects are high but at what costs? Our report on Afterpay goes into to detail on their financial metrics and why they are surging during an economic crisis.

Nextdc (ASX: NXT)

The ASX-100 listed company provides real estate to the digital world. The firm has and is continuing to benefit from the push towards a digital economy by offering data centre and connectivity solutions, among other services. The firm currently operates 9 data centres in Australia and is already servicing clients such as Amazon’s AWS wing.

At a time in which the global economy has been thrown down a hold, Nextdc has emerged from down under and surged by more than 100% in 2020. The stock trades at an all time high with a $5.99 billion market cap.

Coronavirus has punished companies that have not enabled themselves digitally, and this push to go digital has benefitted Nextdc. Growing customer base, partners, and connections has resulted in the stock surging since the March downturn. The as-a-service business model adds consistency to cashflows and growth and hence, reduces risk. It enhances lifetime values of each customer, and as the firm becomes larger. We expect Nextdc to continue to grow with strong economic factors that will back it up.

Nextdc has not just weathered the Covid19 storm but looks like it is emerging out of the crisis stronger than before. Why? Our Nextdc analysis dwells into its unit economics. Investors can read more on our website where we go into detail and analyse the strengths and weaknesses of the firm.

Despite the high performance already, there is still lot more to come from these two firms. The growth forecasts for Afterpay and Nextdc is very high. For more information on these and other tech stocks, have a look at our equity research reports on Afterpay and Nextdc where we go into details and assist you in pick the best tech stocks on the ASX for your portfolio.

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