In this section, we will look at two tech stocks that we really like. We’ve been keen followers of the tech industry and we’ve written about both these stocks before. For one reason or another both stocks have caught our attention and we think investors should look to buy either of these stocks because the upside is compelling. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider.

Company Overview TechnologyOne (TNE) – Is the country’s largest enterprise software company. That is computer software that is developed to satisfy the needs of another organisation rather than an individual. TNE develops solutions that help transform businesses and make life simple for the customers they service. TNE has proven to be one of the most successful Australian companies in the space and since it became profitable in 1992. Earnings growth has been impressive. Like most software companies TNE has had to alter its strategy as the world advanced towards cloud-hosted software as a service rather than traditional on-premise systems paid for on long term licenses. TNE has made the shift and the quality of its products, the benefits of its consistent research and development spending, and the strength of its staff and management are all top notch.

NextDC (NXT) – Put simply, NXT is a data centre operator. Last year I attended a tour of NXT’s Melbourne Data centre (M1). The building is more secure than Tullmarine Airport. It’s bomb proof, bullet proof, nuclear proof and water proof. There are over 160 cameras that constantly monitor the building. Remember that thing called the ‘cloud’… this is where the cloud lives. Where a lot of personal data isstored. Cloud is basically a slang word for storing and assessing data programs over the internet instead of your computer’s hard drive. A data centre is a massive facility that holds computing equipment such as servers for an organisation. This allows a company to keep all its IT operations, equipment (where it stores, manages and disseminates its data) in one place. Consequentially the security and reliability of data centres and their information is a tip top priority for organisations. The company offers its services to a corporate, government and IT services companies. Its data centres are designed to address the market’s growing need for energy-efficient, independent data centers in which organisations can host their critical IT infrastructure, and also to address the growth of cloud computing. The M1 centre uses massive solar panels which generate enough electricity to power 88 Homes and will significantly reduce NEXTDC’s running costs in terms of energy. Here’s an interesting fact – NextDC uses more energy to power itself than the entire Crown Casino. It’s all about power. Here are the things data centre operators need to consider, floor space and total power available. They tend to charge more for the same space if the power density (kilowatts per rack) is higher. NXT charges a standard rate across all of their data centres for power usage. It’s charged per kilowatt.

Fundamentals

On the StockOmeter both stocks rate in the Not Bad category and are almost identical in StockOmeter rankings. TNE on 58 and NXT on 56. TNE rates slightly higher. It trades on a PE of 42x but its easily justifiable sitting on a steady yet rising ROE of 32%. Yield is skinny but there next to no debt. NXT on the other hand is sitting on a lofty PE of 56x and has only just started to make money. It’s no-where near as profitable as TNE but its ROE is rising and fast. EPS growth in NXT is up 332%. Both companies are of similar market cap.

Technical Analysis

Funnily enough, both charts are quite similar. NXT has recently broken out on the upside and looks to be making higher highs. It is trading with bullish momentum and is in a solid uptrend. TNE is showing a similar sort of chart. The upside break out hasn’t been as distinct and is in its early stages of its break out. So it’s probably better bang for your buck as its trading closer to its support line.

Broker Views

TechnologyOne (TNE) – 2 Neutrals & 1 Buy

  • Macquarie has an Outperform recommendation with a target price of $6.30. The company’s recent 16% profit increase was above expectations and came with a final & special dividend. Which was a bit of a surprise. Cloud revenue is going well, it also provides the company with the opportunity to up-sell clients to a higher stickier solution.

NextDC (NXT) – 6 Buys

  • Citi has a Buy recommendation with a target price of $5.18. Following NXT’s latest debt raising, Citi believes the company’s financial positon is a lot stronger. There are favourable projections for the cloud data industry globally and it bodes well for the company.

Unconventional View
Both companies are on a similar footing, yet their businesses are very different. TNE is a software enterprise whilst NXT is a physical data centre operator. Both companies are in a prime position to leverage from a growing tech sector. So you really can’t go wrong buying either stock. On fundamentals TNE is probably the better out of the two. It has posted 17 years of record revenues, continuing unprecedented growth of its SaaS business and the barrier to entry into its sector are very high. TNE looks after a niche market – Australian local government and higher education sectors and its revenue model is strong – it generated revenue by charging members an annual fee which is stable and recurring. It’s only competitive threats come from SAP and Oracle. Some of the company’s new customers were – TAFE Queensland, La Trobe University, the University of Dundee and the UK’s Leicester City Council. Its products continue to beat rivals and win big contracts against multinationals and government entities. NXT on the other hand grows via the opening of new data centres. It’s very cost intensive process as data centres aren’t cheap. From its humble beginnings and shakystart, NXT has done a great job. The company continues to raise a combination of debt and equity to increase investment in land and the development of new infrastructure in Melbourne (the most profitable site) and Brisbane. It recently secured a site for a Melbourne M2 and Brisbane B2 data centre. The stock is trading on a PE of 56x which is a lot lower than its PE of 206x a year ago. Most of it is due to its share price rally. ROE is quite skinny under 5% and there is no yield. So why would you invest in such horrible numbers? NextDC is a long term put in your back cupboard capital growth story. The company has spent big bucks on building these Fort Knox data centres. The capital outlay is huge and the earnings is little and slow. The company is slowly but surely turning a profit. Its HY profit was $19.3m up 18.6%. FY outlook is for revenue to hit $115m-$122m and EBITDA in the range of $46m-$50m. S2 is also under contract with development approvals in progress and completion expected towards the end of 1H18. With the relentless demand for data set to explode in the coming years, NXT will continue to expand and benefit from this thematic. All in all, the company is in the right space.

Both stocks are technically attractive albeit a touch expensive. Therefore, we advise investors buying TNE or NXT to set a trailing stop loss of around 15%, so in the event that the company disappoints, you’re out and the downside is protected.