With the global outlook remaining uncertain, market participants continue to remain particularly divided on one sector, Technology. Over the past decade, we’ve seen businesses within this sector reach extraordinary valuations. Even with basement-level interest rates, these valuations relied on best-case scenario growth assumptions.
However, now that opportunity cost is front of mind for many (previously optimistic) investors, we have seen a drastic derating across the sector. With the above in mind, we have identified three leading companies which sit below their respective average valuation multiples.
Xero Limited (XRO) is a New Zealand domiciled public technology company, listed on the Australian Securities Exchange, which provides a cloud-based accounting software platform for small and medium-sized businesses. Xero has amassed over 3.5 million users, and it continues to adopt new integrations, enabling businesses to conduct various administrative duties from a centralized hub.
In their most recent update, Xero missed earnings expectations as international growth slowed in comparison to previous periods. Despite this, Xero is still growing at double-digit rates with an extremely loyal customer base, with churn sitting around 0.91%. Investors are currently hesitant about Xero’s price, as the valuation seems stretched when using traditional metrics.
REA GROUP LTD
REA Group Ltd (REA) provides property and property-related services on websites and mobile apps across Australia and Asia. REA’s customers include real estate agents, developers, property-related businesses, and advertisers. The business also helps consumers finance their property needs through a multi-channel digital and broker proposition. REA has two operating segments: Property & Online Advertising and Financial Services.
In their most announcement of results for the three months ended 30 September 2022, REA highlighted strong performance across their core operations, including double digit-growth across both revenue and EBITDA.
Since its launch in 1998, Seek has become a leader in the employment marketplace and is currently operating across Asia Pacific and Latin America. Seek was launched to enable candidates and employers to connect more efficiently, essentially moving print media ads to an online interface. The business has a capital-light structure, strong margins, and significant operating leverage.
Seek has managed to grow at a consistent rate since inception, and in their most recent update, management was able to affirm revenue guidance of $1.25bn to 1.30bn. If this is achieved, revenue growth for FY23 represents a ~12% increase vs FY22.