ASX-listed software firms held up well after full-year results and fiscal 2025 guidance. In contrast, US software stocks have sold off on fears that artificial intelligence investment is crowding out software. We expect stable medium-term demand given most ASX-listed software companies are vertically integrated and focused on specific industries. 

 

tech chart

Source: Morningstar. Data as of Sept. 30, 2024. 

 

These moated tech stocks currently screen as the cheapest ASX players, both with a five star Morningstar Rating. 

Audinate Group Limited AD8

  • Moat: Narrow
  • Fair Value: $18.50
  • Last Price: $9.95 (as at 9 October 2024)
  • Price to Fair Value: 0.54 (Undervalued)
  • Fair Value Uncertainty: High

Audinate Group Ltd (“Audinate”) provides an award winning audio over IP networking solution, Dante, which is a market leader that is used extensively in the audio industry.

We believe Dante will become the industry default for digital audio networking. This is largely due to network effects continuing to draw additional AV professionals and original equipment manufacturers (OEMs) into the Dante digital audio networking protocol.

The market reacted rather sharply to its fiscal 2024 results and guidance for a reduction in revenue for fiscal 2025 and a flat to slightly negative gross profit growth, compared to market expectations for more than 20% growth in both.

Software-based sales saw significant growth in fiscal 2024 with unit growth exceeding revenue growth, growing at more than 100% and 80% for IP Core and Dante Embedded Platform. On the other hand, hardware sales were a negative surprise through the year which partially offset the strong software based sales. We believe this is another sign that the company is undergoing a business model transition.

At current prices Audinate screens as materially undervalued, indicating that the market assumes this slowdown signals a degradation of competitive position or an exhaustion of its addressable market.

Conversely, we believe it may be reflective of the company’s one-off transition in business model, similar to what we have seen in many software-as-a-service businesses.

 

FINEOS Corporation Holdings PLC FCL

  • Moat: Wide
  • Fair Value: $3.10
  • Last Price: $1.39 (as at 9 October 2024)
  • Price to Fair Value: 0.45 (Undervalued)
  • Fair Value Uncertainty: Very High

Recently starring in our Australia and New Zealand Best Stock Ideas report, we believe wide-moat FINEOS Corporation Holdings PLC (“Fineos”) has investment merits not generally found in profitless technology companies.

The firm is a global software vendor providing modern cloud-based software products (FINEOS Platform) for core system administration functions within Life, Accident and Health insurers and employee benefits providers.

The Group helps its clients move from outdated legacy core systems to the modern Software-as-a-Service (SaaS) for new business, policy administration, billing, absence, and claims management, enabling improved operational efficiency, increased effectiveness and customer care.

The company's path to profitability was reaffirmed by recent results, with EBITDA turning positive, revenue growth picking up pace, and positive free cash flow generation (almost doubled in the prior corresponding period). The firm is well-positioned to capitalise on the growing adoption of cloud software by insurers, supported by long-standing customer relationships and increasing client retention.

Growth in Fineos’ product development spend is slowing as implementation work with some large clients in complete. We believe it’s better positioned to increase margins as capabilities can be deployed across multiple clients without substantial costs.

We expect ongoing earnings growth, supported by increase adoption of its cloud-based products, new client acquisitions and cost efficiencies. For these reasons, it is our view that the shares are materially undervalued.

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Terms used in this article


Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.