When you look around, chances are the products and services you use most each day are built using the latest technology. In this article, I’ll name two impressive ASX technology shares you can add to your long-term watchlist.
Is technology risky?
Sure, spotting the companies which make these products and services a reality for everyday consumers and businesses long before other investors can be risky. However, if you are a shrewd long-term investor, put in the work to understand the businesses and products, and then diversify your holdings across many companies, the benefits of being a long-term investor in technology shares can be terrific.
Like most businesses, the best kinds of technology businesses tend to be those that offer a product or service which deeply embeds itself in the customer’s life/business. Think about your favourite email provider (e.g. Gmail), document software (e.g. Word) or your workplace’s software system (e.g. SAP) – how hard would it be to remove it?
For the technology companies and their clients, these products and services can be very ‘sticky’ and generate high amounts of recurring revenue, making their returns more predictable for analysts and investors (thus improving their valuations). What’s more, thanks to the benefits of scale and cost advantages, good technology businesses can go on to generate very high profit margins (e.g. gross profit, EBITDA, EBIT and so on).
So with that in mind, here are 2 ASX tech shares with many of the hallmarks of a great technology business – attractive economics and all.
Xero Limited (ASX: XRO)
Founded in New Zealand in 2006, Xero has become the dominating player in the business and accounting software market in Australia, New Zealand and the UK. Employing over 3,000 people, Xero helps more than 2.2 million subscribers manage their accounting and tax obligations.
Xero is a great example of a sticky product that embeds itself into its customers’ day-to-day operations – these customers being small and medium-sized enterprises. While accounting is often far from sexy, it’s nevertheless an integral part of running a business. And Xero’s software makes this process simple, more efficient, cost-effective, and accessible.
What’s more, the company operates a partner program in which accountants will ‘champion’ Xero’s software and effectively sell subscriptions to their client base. The value proposition for these customers is typically a meaningful reduction in the accountant’s time and thus, fees.
This all culminates in a highly scalable product with juicy economics, minimal churn (1.13%), an overwhelming proportion of recurring revenue (98%), and high switching costs.
Of course, this is no secret and the market is certainly attuned to Xero’s success to date, and it’s a significant opportunity moving forward. In fact, Xero shares have recently been hitting new all-time highs, despite the risks that COVID-19 presents to small businesses.
While COVID will likely inflict short-term pain on Xero’s business, I believe the company’s long-term prospects remain intact. As such, I’m a happy long-term holder of Xero shares today. Pricing, subscriber growth, regional performance and SaaS metrics are some of the things I’ll be keeping an eye on moving forward, as our analyst Owen Raszkiewicz explains in this video. Click here to subscribe for our free stock videos.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is another ASX tech share in my portfolio and, like Xero, just so happens to be a Kiwi company. It’s emerged as one of the ASX ‘winners’ so far in the wake of COVID-19, with shares up 123% year to date and 264% since bottoming out in March.
For those unfamiliar, Pushpay is a donation system and software business for churches, not-for-profits and education providers in the US, Canada, Australia and New Zealand. That said, its core market is the US faith sector. Pushpay makes money by charging a subscription fee for its solutions (e.g., custom church apps and church management software) but also from clipping the ticket on processing donations.
Although the Pushpay share price fell more than 40% in the March sell-off, the company has since been buoyed by a string of positive announcements. The biggest announcement came in early May when the company delivered its full-year FY20 results.
Pushpay’s scale was on full display, with revenue jumping by 28% while costs fell 8% year over year. Such is the power of the company’s business model, which provides for wide gross margins (65%) and enjoys significant revenue growth from existing customers.
What’s more, COVID-19 has brought forward the adoption of digital solutions by many US churches as services move online. Pushpay has reported an overall increase in demand for its services in the wake of the pandemic, along with increased processing volumes due to the uplift in digital giving as a proportion of total giving.
Looking long-term, Pushpay has lucrative add-on and cross-sell opportunities (due to its acquisition of Church Community Builder in late 2019), a large addressable market to tap into, a sticky and highly scalable product, and a clear value proposition for its customers.
While a lot of this upside potential has now been priced into Pushpay shares, I still believe there is plenty of room left to run (provided you’re a long-term investor, of course).
Looking for more ASX share ideas in the tech space? Then grab a copy of the free report below!
Disclosure: Cathryn owns shares of Xero and Pushpay.