2 ASX Tech Companies Poised for Long-Term Growth

August 26, 2024 10:15 AM AEST | By Team Kalkine Media

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2 ASX Tech Companies Poised for Long-Term Growth — Image source: Shutterstock

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Highlights:

Top 2 ASX Tech Companies with Strong Growth Potential

Key ASX Tech Innovators to Watch Over the Next 5 Years

Long-Term Australian Tech Leaders Shaping the Future

When thinking about technology, Silicon Valley often comes to mind. However, Australia’s tech sector, though smaller in size, offers substantial innovation and potential that should not be overlooked.

There is significant breadth and depth in the opportunities available in Australia's tech space, which helps to mitigate the concentration risks seen in the U.S. tech sector.

The Australian market offers exposure to multiple angles of technology, including fintech, education technology, medical technology, and general software technology, providing diverse opportunities for growth.

Two leading tech companies in Australia, from the med-tech and fintech segments, demonstrate significant potential for structural growth in the coming years.

The Australian tech space has been remarkably innovative over the past two decades. Companies like Seek (ASX:SEK), REA Group (ASX:REA), Carsales.com (ASX:CAR), Altium (ASX:ALU), Resmed (ASX:RMD), and Fisher & Paykel (ASX:FPH) have led the way across various sectors, including software and medical technology. This innovation positions Australia as an exciting market with considerable potential.

Unlike the U.S., where tech giants dominate the indices, the Australian market doesn't face the same concentration risks. The tech sector in Australia's mid and small-cap space represents around 10% of the index, which is relatively low compared to the U.S. This diversification provides a more balanced investment landscape.

Valuation remains a key risk in the Australian tech sector. The limited number of available stocks in certain sectors can drive up prices and push multiples higher. For instance, Pro Medicus (ASX:PME), a med-tech company, trades at 150x earnings, while Wisetech (ASX:WTC) is near 100x. Other stocks like Netwealth (ASX:NWL) and Hub24 (ASX:HUB) trade at around 40-50x. These elevated valuations are something to be mindful of when exploring opportunities in the tech space.

Despite the valuation risks, there are significant growth opportunities within the Australian market. Companies like Netwealth and Hub24 have shown strong structural growth and continue to capture market share from legacy systems. Their technological innovation and strong service leadership have enabled them to adapt to the market's evolving needs, particularly as the financial services industry undergoes significant fragmentation.

In navigating the challenges of valuation, it's crucial to consider the price-to-earnings (P/E) ratio relative to the return on equity (ROE) and the P/E to growth (PEG) ratio. These metrics help assess the organic growth potential and provide a clearer understanding of whether the valuation is justified.

The Australian market continues to be an exciting place for technology innovation. Companies like Pro Medicus and Netwealth are positioned to benefit from long-term structural growth, making them stand out as leaders in their respective fields. With ongoing advancements in fintech, education technology, medical technology, and software, the Australian tech sector remains a compelling area for investors to watch.

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