The two ASX tech stocks on Goldman Sachs’ high conviction list

In the wake of the global banking crisis, an unlikely winner has emerged from the equity market’s rubble - big tech stocks. In the US, the mega-eight (as Yardeni Research has dubbed it) now comprises more than 23% of the S&P 500. Here in Australia, the ASX Tech Index has also had a healthy run in the last three months, especially against the broader ASX 200. 

But now that reporting season is done and the confessions are in, which tech stocks will stand out? Goldman Sachs has run its ruler over the ASX tech sector and picked out five of its favourite plays. Plus, find out which stock made Goldmans’ conviction list.

Five key themes

1. Demand remains strong and those earnings revisions in US tech have not flowed through to Australia with the same magnitude.

2. Margin and wage pressures are now easing. ASX tech stocks with an overseas exposure will also be welcoming the lower Australian dollar.

3. The hiring and firing we’ve seen in the US tech sector has not hit our shores as badly (although job vacancies have reduced dramatically).

4. Supply chain issues continue to ease.

5. Wisetech Global (ASX: WTC), Xero (ASX: XRO) and SiteMinder (ASX: SDR) have all improved their respective industry loyalty-to-cost ratios (called the LTV/CAC ratio).

Which tech stocks will be rewarded the most?

Goldmans believes there are three things investors want to see from these major tech companies before share prices are rewarded. 

1. Demonstrating top-line earnings resilience or creating a reasonable plan for upgrading revenues.

2. Tight cost management - and as we’ve seen in the US, even mass layoffs are now being rewarded by investors as a sign that management is serious about improving margins. 

3. Reasonable valuations - and while profitable names have clearly done better than unprofitable names, the valuation gap is presenting opportunities as well as traps.

And the winner is…

Goldmans has two top picks in the tech sector, and both reflect a shift from an all-defence strategy to a part-offence, part-defence strategy.

• Life360 (ASX: 360) is a BUY, Xero (ASX: XRO) is a BUY and it’s on the Conviction List.

• Defensive picks include: REA Group (ASX: REA), Data#3 (ASX: DTL), and Macquarie Telecom (ASX: MAQ). REA Group is the name of this list that is on Goldmans’ Conviction List.