If I had $3,000 to invest into ASX tech shares, I know exactly which ones I’d want to buy.
I’m not looking to add Afterpay Ltd (ASX: APT) or Zip Co Ltd (ASX: Z1P) shares to my portfolio. I’m looking for businesses that are already making good profit.
Instead, on my watchlist are names like Kogan.com Ltd (ASX: KGN) which I just included in an article. But these three ASX tech shares are also high on my watchlist:
Redbubble Ltd (ASX: RBL)
Redbubble is an e-commerce business in the artist product space. It’s a pretty cool concept. Artists – anyone – can make designs which are then printed onto various high quality products like t-shirts, phone cases, stationery and so on. Online shoppers can then pick the products they want like a normal online shopping experience on the websites of Redbubble.com and TeePublic.com.
I really like the economics of an e-commerce business – volume growth makes its profit grow faster than revenue as it leverages the existing infrastructure. Redbubble can also benefit from network effects – more artists leads to more products which could attract more customers which would lead to more artists and so on.
In the latest result, Redbubble saw its revenue and operating cashflow both double, despite a high level of investment into improving its capabilities.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is one of my favourite ASX tech shares at the moment. It’s one of those companies that’s leveraged to the shift from cash payments to digital payments, which I don’t think is going to go back after COVID-19 impacts fade. Pushpay helps churches process donations and it also offers church management tools. Its best offering called ChurchStaq is proving successful with clients.
The company is generating enormous operating leverage right now. In the FY21 half year result alone it saw the EBITDAF margin (EBITDA explained – the F stands for foreign currency) climb from 17% to 31%. That’s a big increase in just one year.
I think there could be a lot more profit growth to come over the next couple of years. Pushpay shares look very reasonably valued at just 23 times the estimated earnings for the 2023 financial year according to CommSec.
Xero Limited (ASX: XRO)
The Xero share price has drifted 20% lower over since the start of the year. But its market share and business strength is just getting stronger. I think it’s worth starting a position in.
Xero has a gross profit margin that’s steadily climbing towards 90% and this allows it to heavily re-invest new revenue into improving the offering for its global subscribers. It is dominating in New Zealand and Australia, whilst rapidly taking market share in the UK. Recent acquisitions make it likely that the ASX tech share can do well in North American and Europe as well.
It’s harder to value a business that’s deliberately not making much profit. But strong re-investment can work out very well for a business over the long term if it’s really good. I think Xero has a chance of one day being among the biggest shares on the ASX.
Other ASX tech share ideas
I also like other ASX growth shares in the tech sector such as Altium Limited (ASX: ALU), Temple & Webster Group Ltd (ASX: TPW) and Audinate Ltd (ASX: AD8).
