We’re getting closer to Christmas and even closer to the US election. ASX tech shares can be a great way to grow your portfolio, so I’m going to write about two I’d buy.
I believe technology businesses have some inherent advantages. It’s easy to roll out technology to customers, meaning quick expansion. It’s very cheap to replicate technology, so that should mean higher profit margins. They don’t take a lot of capital to grow (they usually don’t need a factory). Some ASX tech shares have recurring revenue, making them quite defensive.
Without further ado, here are my tech ideas this month:
Redbubble Ltd (ASX: RBL)
Redbubble is one of the world’s leading online artist marketplaces for products. It runs both Redbubble and Teepublic that sells a variety of things like wall art, clothes and masks.
It had a strong FY20. Marketplace revenue rose by 36% to $349 million, gross profit rose by 42% to $134 million, operating EBITDA (click here to learn what EBITDA means) jumped by 141% to $15.3 million and EBITDA increased 358% to $5.1 million.
To me, it seems like the shift to online shopping may be here to stay. COVID-19 has dramatically increased the adoption curve.
There has been more growth at the start of FY21. July marketplace revenue grew by 132% and there was similar sales levels in the first two weeks of August on a paid basis.
The AGM is being held later this month, which could show strong growth for the whole first quarter of FY21. But it’s the long term which I’m particularly excited about. As an online marketplace, the more artists it has the more potential buyers that are going to be drawn there. The more potential buyers, the more likely it is that other artists will want to sign up. It’s a pleasing circle.
Looking at Redbubble’s share price and market cap, it’s valued at under 30 times the free cash flow from the 2020 financial year.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay could be one of the most promising ASX tech shares. It ticks a lot of boxes.
In FY20 it saw its gross profit margin improve from 60% to 65% in just one year. That shows the strength of its economies of scale. The company has been growing its processing volume and revenue at an impressive rate over the past few years.
The donation business achieved EBITDAF (click here to learn what EBITDAF means, the F stands for foreign currency) of US$25.1 million in FY20, up from US$1.6 million in FY19. Pushpay was previously guiding that EBTIDAF in FY21 would be between US$48 million to US$52 million. Pushpay is now guiding that EBITDAF will be between US$50 million and US$54 million after upgrading its guidance.
Pushpay has a long term goal of US$1 billion yearly revenue from its main client base – large and medium US churches. Social distancing is helping accelerate the growth of donations electronically. One of the main advantages of Pushpay’s system is that churches can video stream the service to people, helping them stay connected.
Looking at Pushpay’s share price and the CommSec earnings estimate for the 2021 financial year, it’s valued at around 38 times the estimated forward earnings.
Summary
Both of these ASX tech shares look like exciting opportunities to me. I’d probably go for Pushpay first because it could keep growing even if there’s more COVID-19 disruption or the US election causes volatility. But remember, ASX tech shares aren’t the only ASX growth shares worth considering. I like Bubs Australia Ltd (ASX: BUB) too. And for defence I really like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which I wrote about here.
