Buy this ASX tech stock for a 26% return

Pointsbet Holdings Ltd (ASX: PBH) shares were on fire on Monday.

In response to the release of a guidance update, the ASX tech stock rose 10% to end the day at 50 cents.

The good news is that one leading broker believes the sports betting company’s shares are still undervalued despite this gain.

As a result, it is recommending Pointsbet shares as a buy right now.

Why is this an ASX tech stock to buy?

According to a note out of Bell Potter, its analysts have responded to the update by retaining their buy rating and 63 cents price target on the company’s shares.

Based on its current share price, this implies potential upside of 26% for investors over the next 12 months.

To put that into context, a $10,000 investment would turn into $12,600 if Bell Potter is on the money with its recommendation.

Commenting on the update, the broker said:

PointsBet upgraded its FY24 normalised EBITDA guidance from a loss of $(9-14)m to a loss of $(4-6)m (vs BPe loss of $(9.9)m). The company attributed the upgrade to “continued strong year-to-date trading in H2 FY24 and increased operational efficiency and productivity.” The upgraded result reflects a significant improvement on the FY23 normalised EBITDA loss of $(49.0)m for the continuing operations (i.e. Australia and Canada). There was no mention of or change in the FY25 guidance of positive group EBITDA and we expect this is unchanged. CEO Sam Swanell said “we continue to invest for further growth, in particular our core technology and product capabilities and … this is driving our market share growth and setting the Company up for further success in FY25 and beyond.”

Why should you invest?

Overall, the broker believes the market is undervaluing the company on a sum of the parts basis. It also sees the ASX tech stock as a potential takeover target, especially given the recent simplification of its operations. It said:

We determine our price target for PointsBet through a sum-of-the-parts (SOTP) and there is no change in the $0.63 valuation. The components of this valuation are $150m for the Australian business ($0.46/share), $25m for the Canadian business ($0.08/share) and $30m in corporate cash ($0.09/share). We note we ascribe no value for the Banach technology which PointsBet can continue to use for in-play betting in Canada and, to a lesser extent, Australia. We also believe PointsBet is a potential takeover target given its market position (fifth largest in Australia), simplified structure (Australia and Canada), proprietary technology and good Balance Sheet.

The post Buy this ASX tech stock for a 26% return appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended PointsBet. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.