If I were going to buy just one ASX growth share today with $1,000 today I’d go for Pushpay Holdings Ltd (ASX: PPH).
High conviction thoughts
I think it’s worth going with an individual ASX share if you have a high conviction in it. If you don’t think it’s a great idea you may as well just go for an easy ETF like Betashares Global Quality Leaders ETF (ASX: QLTY) instead.
It’s fairly difficult to find businesses that are both promising and reasonably priced at the moment because of the extremely low interest rates and (largely) bullish market sentiment.
Some ASX tech shares have been drifting lower in recent weeks. I think Pushpay is one of those ideas that make quite a bit of sense right now.
Yesterday I covered how Pushpay upgraded its profit expectations for FY21. The digital giving business has been frequent in beating its own guidance during this troubled COVID-19 period. More people are donating digitally rather than with cash. COVID-19 effects may mean that people aren’t physically attending their church, but still want to donate.
Strong growth in Pushpay’s margins
I think many investors may underestimate how powerful tech shares can become as they scale. As investors, we (should) value businesses based on their profit growth and profit potential. Growing profit margins means that profit can rise at a much faster pace compared to revenue growth.
I was very impressed that Pushpay’s EBITDAF margin went up from 17% to 31% (EBITDA explained – the F stands for foreign currency) in the FY21 interim result. It’s the expected continuing rise of the EBITDAF margin that makes me believe that Pushpay’s profit can continue to rise at a very fast pace and justify a higher Pushpay share price.
Could slower growth be coming?
Operating revenue growth could well slow down a bit in the medium term – that’s normally what happens as businesses get bigger and bigger. There are only so many large US churches out there for Pushpay to win.
But whilst the number of new large churches may slow down, I think the dollar amount that it processes could continue to grow as the economic picture in the US improves and the total amount of donations (including cash) from congregations recovers. I think that there’s a one-way shift to digital payments and digital donations, I don’t think this is a one-off coronavirus boost.
Pushpay looks like a great business at good value
Pushpay is valued at 39 times the estimated earnings for the 2021 financial year and 27 times the estimated earnings for the 2022 financial year, using the projections on CommSec.
For how promising Pushpay looks, I think it’s very reasonably valued and can deliver very solid returns if it can open up other growth avenues such as other countries and smaller churches. Other ASX growth shares that look interesting include VanEck Vectors Video Gaming and eSports ETF (ASX: ESPO) and Redbubble Ltd (ASX: RBL).
