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Your Guide to Small-cap ASX Tech Stocks

Want to get into the Australian tech sector? Here’s how to invest in small-cap ASX tech stocks.

According to Jason Zweig, author and financial journalist for the Wall Street Journal, small-cap stocks can provide opportunities, especially when markets are overvalued.

Along with this, a report from Data61 states that tech innovation in Australia is projected to have a AU$315 billion impact on the overall economy over the next 10 years.

With the WAAAX companies — WiseTech (ASX:WTC), Afterpay (ASX:APT), Altium (ASX:ALU), Appen (ASX:APX) and Xero (ASX:XRO) — reaching record valuations, small-cap tech stocks are a new market segment for investors to find both growth opportunities and discounted valuations.

Though they are sometimes overshadowed by Australia’s dominating resource and mining sector, just over 50 small-cap tech companies are listed on the Australian Stock Exchange (ASX).

Here the Investing News Network outlines some of the pros and cons of investing in this market segment, and highlights some of the small-cap ASX tech stocks available for investors.

Pros of investing in small-cap ASX tech stocks

According to Dominic Rose, portfolio manager at Montgomery Investment Management, three key growth themes have emerged for small-cap tech companies on the ASX.

First, Rose points out that the ASX has become an attractive market for tech due to lower listing costs and stronger investor appetite in the sector. Additionally, tech’s inherently disruptive nature can lead to structural change driven by innovation. Paving the way in tech specifically are cloud, software-as-a-service (SaaS) and artificial intelligence (AI) companies.

For example, as enterprises transition from localized servers to the cloud, new growth opportunities are cropping up. 5G Networks (ASX:5GN) has emerged as one key player in this market. 5G Networks provides cloud, hybrid and data centre services to help usher in this transition for businesses.

Secondly, fintech is a subsector of tech that presents a major area for growth potential in small-cap companies. The digital platforms embedded in many fintech business models are fast, agile and create a more engaging customer experience.

As Rose points out, independent wealth platforms in Australia — such as HUB 24 (ASX:HUB) and Praemium (ASX:PPS) — are giving legacy platforms a run for their money. Small-cap fintech companies in payments, blockchain and ewallets are also ripe for growth in Australia, says Rose.

Lastly, investment from investors in the Asia Pacific is projected to grow as the middle class continues to emerge and as investors seek out new business opportunities.

This is coupled with the growing trend of ecommerce platforms such as Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) gaining a greater share of the retail market. Interestingly, this trend could be accentuated by the ongoing trade war between the US and China, posing an opportunity for Australian markets.

Cons of investing in small-cap ASX tech stocks

Unsurprisingly, there are a number of cons associated with investing in small-cap tech stocks on the ASX.

For example, forward earnings cuts, downward revisions to gross domestic product and consensus forward earnings per share downgrades can figure prominently into the share prices of small-cap firms.

What’s more, risks increase when small-cap companies report net losses, large amounts of debt, negative cash balances or recurring negative revenues.

One way to minimize the risk when investing in small-cap tech stocks is to do your research. Examine company balance sheets and watch whether the company is posting a positive net income, positive cash balances and growing revenues. It is also important to evaluate the strength of the company’s management team.

Overview of small-cap ASX tech stocks

While tech companies make up only a fraction of the ASX, there are a number of small-cap tech stocks for investors to watch for. Several are listed below — all companies listed were taken from this list and had market caps between AU$50 million and AU$500 million as of October 29, 2019.

  • Dubber (ASX:DUB): Dubber is a cloud-based software company that provides call recording software for businesses. Additionally, Dubber analyses customer calls using AI. To do so, the company takes note of customer sentiment, emotion and language and integrates this into customer relationship management platforms.
  • Aeeris (ASX:AER): This is a security analytics firm that provides early warning network services focused specifically on geospatial hazards. Aeeris aggregates data to forecast hazards and severe weather and then provides hazard alerts to people and businesses in affected areas.

  • 5G Networks: As mentioned above, 5G Networks owns 600 data racks across its data centres in Sydney, Adelaide and Melbourne. It is introducing wholesale data centre services in combination with cloud services and fibre networks to its client base.
  • Animoca Brands (ASX:AB1): Animoca Brands is a gaming company that runs games such as F1 Delta Time, Crazy Kings and The Sandbox. The company has faced some scrutiny from the ASX surrounding a capital raise for a proposed acquisition, resulting in a suspension of trading in September.
  • Aeris Environmental (ASX:AEI): Aeris Environmental provides HVAC energy solutions through its proprietary real-time analytics technology. It has a market cap of AU$51.23 million and is integrating location-based facility management services into its business model.

ASX small-cap funds

Investors who don’t want to invest in individual small-cap tech stocks on the ASX might consider funds focused on this area. For example, Colonial First State Smaller Companies is a fund that invests in Australian small caps that have consistent earnings and strong financials. The fund has achieved a 12.8 percent annual return over the past five years.

“The focus remains on unearthing companies with sustainable competitive advantages, but the emphasis on balance-sheet strength and cash flow has increased,” Anshula Venkataraman, analyst, manager research, at Morningstar, said regarding the fund.

Its top holdings include IRESS (ASX:IRE), NIB Holdings (ASX:NHF) and Independence Group (ASX:IGO).

There is also the Pengana Emerging Companies Fund. It takes an active approach, investing in companies that are income generating. Since its inception in 2004, this fund has reported an annualized return of 13.48 percent. Included in its holdings is Smartgroup (ASX:SIQ), an online salary packaging company.

In addition to these funds are a number of exchange-traded funds that provide exposure to this market segment, such as the BetaShares Australian Small Companies Select Fund (ASX:SMLL) and the Vanguard MSCI Australian Small Companies Index (ASX:VSO).

When it comes to mutual funds and other investment funds in the small-cap sector, Investors Mutual Australian Smaller Companies has seen annual returns of over 14 percent since 1998. It holds shares of fintech company Appen, location data company Nearmaps (ASX:NEA) and SpeedCast (ASX:SDA), a satellite communication company.

Don’t forget to follow us @INN_Australia for real-time news updates!

Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.

Featured

The novel multi-media campaign, created in partnership with RGA, is built on the concept that consumers can Zip everything around them and pay in four installments Following its global rebrand this summer, digital payment pioneer Zip Co Limited today revealed a new multi-million dollar brand campaign – ‘Zip Now, Pay Later’ – across the U.S., to attract new customers to merchants ahead of the holiday shopping …

The novel multi-media campaign, created in partnership with R/GA, is built on the concept that consumers can Zip everything around them and pay in four installments

Following its global rebrand this summer, digital payment pioneer Zip Co Limited ( ASX: Z1P ) today revealed a new multi-million dollar brand campaign – ‘Zip Now, Pay Later’ – across the U.S., to attract new customers to merchants ahead of the holiday shopping season. From TikTok dance challenges to ‘earworms’ stuck in our heads and glam tips for Zoom calls, ‘Zip Now, Pay Later’ spotlights meme-worthy moments that have captivated millions, all demonstrating that Zip is not only part of the same cultural zeitgeist, but also the payment option of choice for modern consumers who are increasingly shunning credit cards for flexible, transparent digital payment options everywhere they shop.

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The Children’s Place , Inc. the largest pure-play children’s specialty apparel retailer in North America and Afterpay the leader in “Buy Now, Pay Later” payments, celebrate The Children’s Place 2021 Holiday Matching Family Pajama Collection with Kris Jenner Khloé Kardashian, True Thompson and MJ Shannon. “I LOVE the holidays and there is nothing better than gathering my family together and celebrating with …

The Children’s Place , Inc. (Nasdaq: PLCE), the largest pure-play children’s specialty apparel retailer in North America and Afterpay (ASX: APT) the leader in “Buy Now, Pay Later” payments, celebrate The Children’s Place 2021 Holiday Matching Family Pajama Collection with Kris Jenner Khloé Kardashian, True Thompson and MJ Shannon.

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New research conducted by Accenture reveals that in 2021, Afterpay the leader in “Buy Now, Pay Later” payments, drove $4.5b in net benefits to merchants, including $8.2b in incremental sales for retailers and SMB merchants, as they forge their way through the pandemic in 2021. ” US Economic Impact of Buy Now, Pay Later ” highlights the benefits Afterpay has had on the United States economy – including driving …

– New research conducted by Accenture reveals that in 2021, Afterpay (ASX:APT), the leader in “Buy Now, Pay Later” payments, drove $4.5b in net benefits to merchants, including $8.2b in incremental sales for retailers and SMB merchants, as they forge their way through the pandemic in 2021.

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Person looking at credit card while making a purchase on their phone

A subsection of the booming fintech sector, innovative payment services are experiencing a hay day.

Paytech is just what it sounds like — technology for payments. In Australia, changes to open banking laws plus the need for contactless payments through the global pandemic has meant a major uptake in paytech services.

There are more than 1 million Aussies shopping online each month as different parts of the nation continue to be under COVID-related lockdowns and stay at home orders.


A subsection of the booming fintech sector, innovative payment services are experiencing a hay day. Paytech options are everywhere, with examples like mobile, peer-to-peer, cryptocurrency payments and international payments.

5 Biggest ASX Paytech Stocks

The Investing News Network looked at the biggest paytech stocks on TradingView sorted by Market cap. Data for this list was obtained on September 30, 2021.

1. Afterpay (ASX:APT)

Market cap: AU$35.37 billion

The startup founded in Sydney's eastern suburbs five years ago is now a global brand and employs some 700 people globally serving millions of customers. The brand name has become a verb for buy now pay later — "I'll after pay it." AfterPay was acquired by giant payments provider Square for AU$39 billion in August 2021. Group Total Income for FY21 was 78 percent higher than the previous year at AU$924.7 million, and Afterpay Income increased by 90 percent.

Early investors have reaped the benefits of AfterPay's booming rewards. An investigation by the Australian Financial Review found singer John Farnham and wife Jillian started investing in 2017 when share prices were low and today they hold 36,304 shares at a value of close to AU$3.2 million.

2. Sezzle (ASX:SZL)

Market cap: AU$1.13 billion

Sezzle is the Certified B Corp buy now pay later option that listed on the ASX in 2019. Often dubbed the "mini-Afterpay," the business is based in Minneapolis, US, and has been trying to make "Just Sezzle it" happen since it formed in 2016. The company serves customers mostly in North America, with plans to expand to India.

The company reported an after-tax loss of US$30.4 million for the six months ending June 30, 2021, and it saw an income increase of 159 percent for the same period, alongside an increase of 102 percent in costs.

3. Openpay Group (ASX:OPY)

Market cap: AU$173.92 million

Another Australian buy now pay later offering is Openpay, which offers payment plans of up to 24 months and up to AU$20,000. Openpay started in 2013 for Australia and New Zealand, expanded in 2019 to the UK and reached the US in 2020 under the brand name Opy. This contributed to a growth of 44 percent in income for FY21 of AU$26.3 million.

The company positions itself as a financially responsible business for a mature audience wanting funding for life affirming things like home improvement projects. Unlike Afterpay, Openpay does perform credit checks on all clients through their B2B offering, a SaaS-based platform Openpay for Business.

4. Cirralto (ASX:CRO)

Market cap: AU$167.19 million

Cirralto is a transaction services business that supplies a broad range of B2B payment services and a fully integrated digital payment and business software solution known as Spenda. It aims to help businesses to improve their processes and payment terms to so the businesses can get paid faster.

Cirralto's FY21 has been strong, with 157 percent increase in revenue and a 113 percent boost in customer growth. Other big news included the acquisition of software technology company Greenshoots Technology in September 2021. Greenshoots provides a white-labelled eCommerce platform for small and medium businesses.

5. Novatti Group (ASX:NOV)

Market cap: AU$148.95 million

Novatti is a multi-services payment provider for businesses and business customers with year on year revenue growth of around 50 percent for each of the past four years. Its customer base is roughly half fintech companies and banks and half traditional merchants and businesses. Novatti has licenses to operate in Australia, New Zealand and Canada and is obtaining licenses in Europe and Singapore.

The brand has big plans to expand into new markets after a AU$40 million capital raise in July, of which AU$22 million was spent on a strategic investment of a 19.9 percent stake in bookkeeping software Reckon (ASX:RKN). The company is working through licenses with Mastercard and Visa and will be looking to expand into new markets for FY22.

Don't forget to follow us @INN_Australia for real-time updates!

Securities Disclosure: I, Ronelle Richards, hold no direct investment interest in any company mentioned in this article.

carbon emissions

Following international pressure, the Australian government has promised to reach net zero emissions by 2050.

In a last-minute commitment after months of debate, the Australian government has promised to reach net zero emissions by 2050, expecting to meet the goal largely through technology development.

The move comes following international pressure as Australia had previously refused to join countries in pledging to meet the target ahead of the United Nations' COP26 climate conference in Glasgow.

However, the plan unveiled on Tuesday (October 26), which includes a government investment of AU$20 billion, does not strengthen the target set for 2030, with Prime Minister Scott Morrison saying Australia is on track to beat its Paris Agreement goal, cutting emissions by 30 to 35 percent by that decade.


"We will do this the Australian way," Morrison said ahead of a press conference, announcing investments in new energy technologies like hydrogen and low-cost solar.

An Australian hydrogen industry could be worth more than AU$50 billion in 2050, according to the government. Meanwhile, expanding production and processing of metals like lithium, nickel, copper and uranium could together be worth around AU$85 billion in exports in 2050.

That said, Australia will continue to be heavily dependent on fossil fuels as the plan will not shut down coal or gas production. The country is a major coal player, with the third largest reserves in the world, but its reliance on coal-fired power makes it one of the world's largest carbon emitters per capita.

"We want our heavy industries, like mining, to stay open, remain competitive and adapt, so they remain viable for as long as global demand allows," Morrison said. "We will not support any mandate — domestic or international — to force closure of our resources or agricultural industries."

Australia's desire to achieve net zero emissions by 2050 is a step in the right direction, Prakash Sharma, Wood Mackenzie's Asia Pacific head of markets and transitions, said.

"Our analysis shows that Australia can reach net zero emissions by 2050," he said. The country's major trading partners — China, Japan and South Korea — are already in transition towards that goal.

According to Wood Mackenzie, nearly 83 percent of Australia's power generation will come from solar and wind by 2050, as compared to about 20 percent last year. Natural gas, bio energy, geothermal and small modular reactors will supply the remaining 17 percent in power output. Coal into power is expected to be phased out by 2035.

"Although the pathway requires complete transformation of its traditional energy and export sectors, there are significant opportunities to capitalise on and protect future revenues," Sharma said.

"This will require Australia to become a significant player in low-carbon hydrogen trade as well as being able to offer carbon storage and offset services."

Meanwhile, the Australian Conservation Foundation has welcomed the prime minister's commitment to reach net zero by 2050, but said the mid-century goal is only meaningful with deep cuts to climate pollution this decade.

"Unless the government sets the wheels in motion to cut our emissions in half by 2030, it is making climate change worse and turning its back on the opportunities," said Chief Executive Kelly O'Shanassy.

"Australia can become a global clean energy superpower in the next decade by replacing coal and gas with renewable energy," she added. "We have abundant clean energy, tools and talent, but we cannot delay any longer."

Don't forget to follow us @INN_Australia for real-time updates!

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.