Company Interview / "Wildly cheap" tech stocks poised for growth

Key topics:

Caution over software stocks with high multiples in an AI-driven marketPreference for companies able to leverage AI to cut costs, such as Pioneer Credit (ASX:PNC)Differentiation between network-based tech companies and those merely digitising processesDownside volatility in reporting season creates opportunities for active investors

Chris Judd from Cerutty Macro Fund says the recent hit to the tech sector, especially among software stocks with high levels of intangible assets, signals further challenges rather than a short-term buying opportunity. Judd contends that, in the AI era, investors are unlikely to continue paying high earnings multiples for companies whose business model is based primarily on digitising processes. While companies such as Xero (ASX:XRO) may persist, Judd asserts that multiples for these stocks will rapidly contract. He differentiates between process-based tech firms and those utilising powerful network effects like Facebook or REA Group (ASX:REA), noting the latter are likely to be more resilient to AI-driven disruption.

Turning to specific opportunities, Judd is neutral on REA Group but highlights Pioneer Credit (ASX:PNC) as undervalued and capable of reducing its cost base through AI. Pioneer Credit, operating in a duopoly with Credit Corp (ASX:CCP), offers a significant moat in managing debt portfolios: major banks prefer dealing with professional firms to protect customer outcomes. Judd points to Pioneer Credit’s low price-to-earnings ratio, signs of top-line growth, and recent cost-saving announcements as underappreciated by the market.

Reflecting on the reporting season, Judd observes significant downside volatility, where companies missing expectations are heavily punished. However, this creates unique opportunities for active investors as algorithmic trading increases volatility and market inefficiency.