ASX tech shares were whacked 2022, making them interesting investment ideas for 2023. I’d buy some of them.
For a strong-performing long-term investment, I’m looking for names that can grow profit at a strong rate over many years. For me, that’s a combination of good revenue growth and high profit margins.
Plenty of ASX tech shares start on the ASX as loss-making businesses. But, if they have a high gross profit margin, then scaling up means profitability levels like EBITDA (EBITDA explained) have plenty of upside, assuming revenue can keep going up. This means it’s good to identify businesses that have large growth runways.
These are two ASX tech shares that I think tick the boxes:
Xero Limited (ASX: XRO)
Xero is a global accounting software business. It’s used by small and medium business owners, bookkeepers, accountants, financial advisers and so on.
The company’s most important markets (currently) are Australia, New Zealand and the UK. That’s where a lot of the subscribers are. But, it’s also growing in many other regions including the US, Canada, Singapore, South Africa and so on – it would like to grow in most countries in the world.
In the last result, the business saw revenue growth of 30% and a gross profit margin of 87%. This is a strong combination.
The business isn’t making much profit yet, as it’s investing heavily for growth still, so management still think there’s plenty of room to scale – that’s a positive sign in my opinion for the long-term.
With the Xero share price down over 40% in the past year, I think it looks like a prime opportunity.
Airtasker Ltd (ASX: ART)
Airtasker is an ASX tech share that operates a platform that enables people to ask for help with a task such as removalists, accounting, photography, delivery and many other tasks, along with a budget. Taskers can then offer to do that work.
I think this business is a decent inflation hedge because as task prices rise, Airtasker gets more revenue.
At the gross profit level, its margin is above 90%. It’s still investing heavily for growth in markets like the UK and US.
With a low capital cost, I think the business can generate very strong cash flow in the coming years, which can then be used to fund things like acquisitions, buy backs and dividends.
In the first quarter of FY23, the Airtasker business saw 36% organic revenue growth, which is promising for the long-term. I think small cap ASX tech share is one to watch.
