Listen for faint sound of a small-tech rally

THE hoary old line goes that no one rings a bell when a market has hit a low point, but in the case of the small end of the tech sector attentive investors may be picking up a faint chime or two amid the noise about ratcheting interest rates.

In fact, the bells may have started pealing a few weeks ago. The accepted narrative is that rising rates are unhelpful for the sector, as they not only increase funding costs but also trim assumptions about what a growth company should be worth in future.

Now, the market’s assumptions about the pace of rate rises are moderating, despite the Reserve Bank of Australia this week pushing through its fourth increase in four months. The thinking goes that central banks will only increase rates by so far before fears of a full-blown recession supersede the current anxieties about rampant inflation.

Amid the macroeconomic backdrop, tech stocks are having a moment. The share price rallies are also being driven by quarterly or full year disclosures that show that many of them are having solid revenue growth and – perhaps most importantly – are inching towards profitability. The S&P/ASX All Technology Index (XTX) is down 26 per cent over the past 12 months, but has bounced 15 per cent in the past month. “Generally speaking, results and outlooks have been solid, cost growth is more prudent and pre-profit names are moving quickly to break even,” broker Shaw Stockbroking says.

One promising play is Whispir (WSP), which specialises in mass – yet tailored – communications to customers or staff.

Whispir racked up just under $17m of receipts in the fourth (June) quarter, 26 per cent higher year on year.

Whispir also narrowed its loss by 16 per cent to $4.74m and says it should be earning positive by June next year, which is something to shout about. With $31m of cash supporting a circa $120m market valuation, Whispir looks cheap on a revenue multiple of a mere 1.5 times.

An established provider to SMEs, ELMO Software (ELO) has pre-released its results for the year to June 2022: revenue of $91.4m (up 32 per cent) and underlying earnings before interest, tax, depreciation and amortisation of $7.1m (up 11fold on the previous year). Elmo’s world revolves around HR, rostering and payroll tools. Not cutting edge, but in the war for talent it helps to get the basics right, such as paying staff properly and promptly. Management is confident of current-year revenue of $114-120m and EBITDA of $20-25m.

Once again, with a $270m market cap, Elmo trades on a miserly revenue multiple of 2.8 times and could well post a small net profit this year.

In the life sciences sector Mach7 Technologies (M7T)

is moving at warp speed, with record sales of $33m for the 2021-22 year, up 30 per cent. Operating cash flow has also improved by almost 500 per cent, to $6.7m.

The US-focused Mach7 provides medical imaging software and is often mentioned in the same breath as home-grown hero Pro Medicus. The difference is that even after its 30 per cent share ramp over the past month, Mach 7 is valued at $160m while Pro Medicus is worth $5.44bn.

Given the vastness of the small tech sector, investors have a cornucopia of choice and they can be – and must be – selective. Pre-revenue concept stocks such as those developing artificial brain power have their place, although we can’t quite get our head around the $1.8bn valuation ascribed to “neuromorphic AI chip” maker BrainChip (BRN).

But in the current sober climate the short-term rewards will go to those with real revenue and – gasp – real earnings or at least a credible path to profitability. This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.