Brokers identify two structural winners from cloud services emerging as ‘IT of choice’ for a covid-world

Wed 23 Mar 22, 3:55pm (AEDT)
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Source: iStock

Key Points

  • The tech-sector has finally stabilised after a 4-month correction
  • Brokers point to Xero and NextDC as tech plays with upside
  • NextDC shares are pushing 2-month highs, completely unphased by recent Russia-Ukraine concerns

Tech stocks have only recently begun to stabilise after a brutal 4-month selloff.

From November peak to February trough, the S&P/ASX 200 Info Tech Index declined -36%. At its lowest point, the index was -6% below February 2020 levels.

As tech stocks begin to price-in the new era of higher interest rates, here are two tech stocks viewed favourably upon by brokers.

Xero's unfair selloff

Ord Minnett believes Xero (ASX: XRO) has been unfairly clumped together with cash burning or unprofitable tech companies. The company’s stock is down -31% year-to-date. 

The broker said that Xero remains a fast–growing cloud accounting player with a strong market position in regions including Australia, New Zealand and the UK. While North America represents an emerging opportunity to capture market share in the small-to-medium-sized business space. 

Ord Minnett eased its price target for Xero from $130 to $107, taking into consideration the general weakness of the tech sector. However, bumped its rating from Hold to Accumulate. 

In the first-half of FY22, Xero delivered a net loss of -$5.9m compared to $54.3m a year ago, due to an increased level of investment spend across sales, marketing and product development. 

The top-line remained intact, as revenues rose 23% to $506m and subscribers topped 3m, up 23% compared to the prior period. 

Xero Ltd (ASX XRO) Share Price - Market Index
Xero 12-month price chart

NextDC unphased by war

NextDC (ASX: NXT) shares are up 5.7% since Russia's invasion of Ukraine on 24 February.

The stock has arguably been buoyed by a record half-year FY22 results announcement on 23 February.

"As a result of the strong 1H22 performance, the Company is able to upgrade its FY22 Guidance as well as accelerate project investments in 2H22,” commented CEO Craig Scroggie.

The company expects data centre services revenue to be in the range of $290-295m, up from its previous guidance of $285-295m.

Consensus on the stock is a Buy with a $14.05 target price.

The most recent broker note, from Citi, observed the opening of Generation 3 assets in Sydney and Melbourne as a near-term catalyst to drive earnings. The two assets are currently being built, expected to be complete in the second-half of 2022 and first-half of 2023 respectively.

NEXTDC Ltd (ASX NXT) Share Price - Market Index
NextDC 12-month price chart


Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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