If you’re a long-term growth investor on the ASX, it’s worth putting Xero Limited (ASX: XRO), Afterpay Ltd (ASX: APT) and Tyro Payments (ASX: TYR) on your watchlist.
Why technology?
Technology shares have an advantage compared to most other industries because they have much cheaper business models. If you want to sell someone another subscription service it hardly costs the technology company anything. Selling another couch or table takes more costs of logistics and storage.
Here are three tech stocks to consider:
Xero
One of the most attractive things about Xero as a technology stock is its incredibly high gross margin. In FY20 the gross margin increased to 85.2%. This level of profitability means that new revenue from new subscribers falls to the next profit line. It’s why free cash flow was able to increase by 320% to NZ$27.1 million during the year.
Xero has a loyal customer base which pay attractive monthly recurring revenue. There may some some short term COVID-19 problems, but it has an exciting long term future if it can keep growing subscriber numbers.
Afterpay
Afterpay has been on an incredible run since the market crash in March 2020. Today it has almost reached $50. The buy now, pay later business keeps adding customers at an impressive number.
It’s clear the Afterpay is changing the retail landscape. Afterpay could be one of the main reasons why some retailers are able to stay afloat during COVID-19 with customers having the ability to spread out their payments.
Afterpay has said that it has adjusted its risk settings for now, which is a smart move. The two things to consider with Afterpay is: What is a sustainable merchant margin? And is there too much profit growth being factored into the share price?
Tyro
The payments business is an important part of the economy. Each week Tyro releases a weekly trading update to inform the market about the transaction values passing through its system.
In May 2020 to 22 May 2020, Tyro has processed $898 million, a decrease of 18% compared to last year. But in April 2020 the value was down 38%, so it’s clear there has been a recovery.
Why is Tyro still worth watching? Transaction value growth in the financial year to date in May is up 17% to just over $18 billion. As restrictions lift overall growth could return.
What now?
Technology shares are capable of producing fast growth because of how easily their business model allows their software to expand to new customers. Xero is the one I like the most with its attractive monthly recurring revenue.
There some technology ETFs out there worth looking at as well, such as the BetaShares NDQ ETF or the BetaShares ASIA ETF which offer more a diversified international technology exposure for Australian investors.
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