The ASX All Technology Index delivered an 11 percent annualised ten-year return to March 2024

Pros and Cons of investing in Australian Technology stocks

Technology is a growth industry driven by innovation and research that is changing the way people live, work and play. It is a dynamic sector in which digitisation and internet-based services are transforming the way business is undertaken and how people interact. However, clever ideas and making money from them don’t always go hand in hand, which means that investing in tech companies comes with risks. Nevertheless, Australia has a highly educated and tech-savvy population that has a history of quickly embracing new technology such as smart phones, tracking devices, smart watches, apps and more recently, Artificial Intelligence.

The Australian tech sector is more B2B software-focused and is less B2C oriented than (say) the US and doesn’t have the tech giants like Apple and Microsoft, but is home to success stories like Altium, Data#3, and REA Group.

Technology companies typically fall into two baskets – developing brands and mature businesses.

Tech stocks operating at the cutting edge in their developmental phase should be considered high-risk, high-reward investments. On the other hand, established players with a proven product or service suite generating recurring and resilient income streams from an expanding customer base under a subscription revenue model can provide attractive investor returns. This is because often these businesses have lower cost to income ratios compared to traditional brick and mortar business. Moreover, their services are not capital intensive, supporting high Return on Equity outcomes for shareholders enabled by leveraging existing Intellectual Property through operational scale. Additionally, technology and software companies often don’t incur raw material, transportation, or general overhead costs of doing business faced by many retailers, manufacturers, and other service providers.

A tech company’s balance sheet typically comprises intellectual property rather than physical assets and typically sells at a seemingly high Price Earnings ratio, making it appear expensive relative to traditional bricks and mortar businesses. However, off-setting this is the ability to grow earnings significantly during periods of rapid and enduring uptake of new technology, irrespective of the prevailing economic conditions.

ASX All Technology Index 11 percent annualised ten-year return

The ASX All Technology Index (XTX) has enjoyed a 24 percent gain for the six months to 26 March this year and a 70 percent lift over the past five years. This compares to 11 percent and 26 percent respectively for the ASX200 during the same intervals.

Taking a long-term perspective, the ASX All Technology Index has delivered an 11 percent annualised 10-year return, which is well up on the 3.8 percent annualised 10-year return from the ASX200 Index.

Investing for the future

Technology traditionally has been seen as a high-risk high-reward sector, suitable for investors with a long-term time horizon. However, carefully researched ASX-listed companies with established customer franchises and proven technology have delivered consistent long-term shareholder returns, including in periods of slow economic growth.

In contrast, most ASX-listed companies see their revenue move in line with the business cycle.

Well-established tech companies however offer products and services that most people use every day, and this ubiquity gives them market strength and earnings resilience, which is reflected in their long-term share price performance through the economic cycle.