The technology industry is probably the most exciting sector on the ASX. Most technology businesses can be very profitable for investors because of how capital-light they are. It’s not like they require an intensive product assembly line or a vast array of real estate (owned or rented) to operate.
Technology businesses can also ramp up their revenue quickly because they don’t have to physically ship or store their product anywhere. If you can find profitable technology businesses then they could be good investments because of how much of the new revenue falls to the bottom line.
Here are three great ASX tech businesses:
Xero Limited (ASX: XRO)
Xero is the leading cloud accounting software provider in Australia and New Zealand. It has won over the ANZ region with its easy-to-understand functionality and it offers a wide variety of time-saving tools.
It is now growing impressively in the UK where it is rapidly becoming a major player, it just grew UK revenue by 60%. I believe Xero has a big advantage over other accounting software providers because it was able to develop most of its tools within the last decade, whereas its competitors have been incrementally adding to software that is two decades old (or more).
Xero is yet to make a profit, but it’s not far away.
Altium Limited (ASX: ALU)
Altium is one of the world’s leading electronic PCB software companies that help engineers design the products of the future. It has some of the most notable organisations on its client list like tractor company Deere & Co, Toyota, Lenovo, NASA and Cochlear Limited (ASX: COH).
The growing technological nature of our world allowed Altium management to recently predict that revenue would double by 2020 and continue growing beyond that.
Altium has sticky revenue, improving products and a good outlook. However, it’s currently trading at 56x FY18’s estimated earnings.
Citadel Group Ltd (ASX: CGL)
Citadel is a software company that specialises in secure enterprise information management. Essentially what the means is that it provides information to organisations to make decisions.
It provides software on multi-year contracts to organisations like state government organisations such as health or education. Software is increasingly important for any organisation to deliver on its activities.
Citadel has a high retention rate and it can steadily charge more for the product as it adds more optionality and features.
It’s currently trading at 23x FY18’s estimated earnings.
All three businesses are high quality, but both Xero and Altium are trading expensively, even when you take into account the high growth that they are reporting every six months. At the moment the only business I’d want to consider buying is Citadel, which is trading on a reasonable valuation for its projected growth.
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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium, Citadel Group Ltd, and Xero. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.