With many stocks falling in recent days, I think it’s a good time to go hunting for quality ASX tech shares.
I believe that the technology industry is the one that has many advantages compared to most others, including the abilities of quick expansion and strong operating leverage.
That’s why I really like the look of these two businesses:
Redbubble Ltd (ASX: RBL)
Redbubble is an e-commerce business that sells a wide variety of artist-designed products including clothing, stickers, masks, phone cases, wall art, a variety of home and living products, bags, scarves, stationery and more.
I really like an e-commerce business that is able to take its services to the world. Once that platform has been built it can achieve greater margins as more activity occurs on the website. That’s exactly what’s happening with Redbubble right now. Despite investing in global growth, Redbubble’s profit is still growing much faster than revenue.
In the recent half-year result of FY21, the ASX tech share reported that marketplace revenue increased by 96% to $353 million, Gross profit went up by 118% to $144 million, Redbubble’s EBITDA (EBITDA explained) grew by 1,028% to $48.8 million and EBIT improved to $41.8 million, up from a loss of $1.9 million in the prior corresponding period.
I’m not expecting revenue growth to be this strong forever, but profit can continue to rise quickly thanks to the increasing profit margins.
As Redbubble adds more product lines to its website, I think it could be one to watch considering it generated $80 million of operating cashflow in the first half of FY21.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is another ASX tech share that’s delivering excellent operating leverage. This company is about helping large and medium US churches to receive digital donations.
In the last result, which was the FY21 half-year result, it saw operating income grow by 53% to US$85.6 million. Over the long term the company is looking to grow its annual income to US$1 billion as it looks to capture a market share of around half of the faith sector in the US.
In terms of profitability, in the six months ended 30 September 2020, its gross profit margin improved from 65% to 68%. Even better than that, the EBITDAF (the F stands for foreign currency) margin rose from 17% to 31%. This allowed EBITDAF to rise by 177% to US$26.7 million and operating cashflow grew by 203% to US$27 million.
I believe that the market is underestimating how much further Pushpay can grow its total processing volume over the longer-term. Smaller churches, different religions and different countries could all unlock a longer growth runway for the ASX tech share. I think the trend of moving to digital payments isn’t one that’s going to reverse by much (if at all) after COVID-19.
It also looks cheap when compared to many other tech shares looking at the profit projections out to FY23. Using CommSec numbers, Pushpay shares are valued at 21 times the estimated earnings for the 2023 financial year.