Australian technology stocks are facing headwinds amidst an AI-driven market environment, according to RBC Capital Markets analyst Garry Sherriff. Some technology stocks have seen their share prices halve over the last six months. Sherriff suggests that the market perceives lower barriers to entry and potential disintermediation risks, which could adversely affect sales and margins in the medium to long term.
While companies like Pro Medicus, Technology One, REA Group and WiseTech Global are viewed as having more robust market positions, RBC cautions about broader negative sentiment surrounding the technology sector. Furthermore, an appreciating Australian dollar introduces increased earnings and foreign exchange translation risks for these companies. Technology One provides enterprise resource planning (ERP) software. WiseTech Global delivers software solutions for the logistics industry.
RBC has revised its assumptions to account for current economic conditions. The firm has increased the risk-free rate and lowered terminal multiples to reflect inflation, expectations for interest rates, and risks associated with artificial intelligence.
Despite the identified risks and broader sector volatility, RBC maintains Outperform ratings on selected large and small-cap software and data centre companies. These include Technology One, Xero, WiseTech, NextDC, Macquarie Telecom, Megaport, Hansen Technologies and Fineos. RBC believes these companies offer attractive entry points for investors.
