Investors and analysts are nervous that the only way is down this earnings seasonfor already highly valued blue-chip tech stocks and smaller listed softwarecompanies that they say have not done enough to convince investors to take a riskand get behind them.

A week after the tech-heavy Nasdaq entered a correction on fears of a US recession, investors who have crowded into theASX’s most richly valued tech stars predict market jitters could cause an outsized reaction to any disappointing news.

Investors and analysts are wary that Richard White’s WiseTech can deliver on the market’s bullish expectations. Oscar Colman 

“Looking at all the volatility we’ve seen recently, overlaid with valuations lookingvery stretched … any disappointments will get severely punished,” said LucasGoode, a portfolio manager at IML.

Last week shares in Audinate tumbled 36 per cent to $8.48 after the audiovisualnetworking business pre-reported its results, which showed a soft FY25 outlook. Itsshares are now trading 60 per cent below their peak of $23.31 recorded in March.

Forager Funds Steve Johnson said Australia’s biggest listed software companiesXero, WiseTech, Pro Medicus and TechnologyOne were all sitting on loftyvaluations, while shares in investigative software company Nuix are up 114 per cent over the past 12 months.

“There’s just a lot more expectation in these share prices than there was 12 months ago … they need to deliver pretty strong results,” said Mr Johnson.

Investors will be focused on profitability and evidence that tech companies canmaintain growth rates of more than 20 per cent as customers pull back spending in a tougher economic environment.

“I think any company that disappoints – either on cash flow or showing a clear pathto profitability – could have a very, very long way down through reporting season,”said Mr Johnson.

“On these lofty multiples, any suggestion that they are not going to grow at 15 to 20per cent per annum for a long period of time can mean share prices halving.”

The spotlight will be on the ASX’s largest tech company, WiseTech – known for big share price swings – when it reports on August 21.

“We’ve owned WiseTech pretty much since it floated, and you’re always a little bitnervous coming into this time,” said Ben Clark of TMS Capital, noting thecompany’s stock fell 20 per cent on last year’s earnings release, only to bounce back to all-time highs following its first half results in February.

The focus will be on the logistics software company’s margins, new customer contracts and any developments in artificial intelligence. WiseTech is planning to update the market on a number of its AI initiatives.

“WiseTech is one of the few businesses that’s going to be really [at] the forefront of being able to harness AI,” said Mr Clark.

E&P Capital analyst Paul Mason said WiseTech is one of “the riskier stocks in reporting season” because the market has gotten “very bullish”.

”The company has been hinting at launching another generational shift in its business or revenue model … Consensus has gone all in on this, with expectations for organic CargoWise growth in the range of 27 to 29 per cent,” said Mr Mason.

He said Xero and TechnologyOne are both a “great hiding place for anyone scared of the technology sector at large during reporting season”. Both companies report out-of-cycle and will release their results in November.

Small-cap struggles

The ASX’s smaller technology players have been left behind by the broader techrally, with strategic buyers ready to swoop on unloved small-caps.

Hugh Richards of advisory firm Latimer Partners, said institutional investorsremain largely off risk at the smaller end of the tech market since they turned onthe small-cap tech sector in 2022.

“No one is calling a rapid re-rating of the small-cap tech sector soon. In thatcontext, investors [are] looking for good returns to compensate for the risk ofinvesting in tech,” said Mr Richards.

Investors will be keeping a close eye on cash flow and cash preservation as well asany potential for M&A activity, said Mr Richards. 

Local technology companies have landed big takeover premiums from strategicbuyers this year, including Renesas’ $9.1 billion takeover of Altium , US-based PAR Technology’s $310 million takeover of Task Software, and Datasite’s proposal to buy Ansarada’s core assets.

Tess Bennett is a technology reporter with The Australian Financial Review, based in the Brisbane newsroom. She was previously the work & careers reporter. Connect with Tess onTwitter. Email Tess at tess.bennett@afr.com