As a growth investor, tech stocks make up more than half my watch list. Two companies I always have my eyes on are Xero Ltd (ASX: XRO) and WiseTech Global Ltd (ASX: WTC).
If you had invested in either of these companies at the beginning of the year, you would've received a sweet return.
• Xero: A 30.2% increase YTD for a $60.15 close yesterday.
• WiseTech: A 23.6% increase YTD for a $23 close yesterday.
Xero
Xero offers a cloud-based accounting software-as-a-service for small and medium-sized businesses. It just released its FY results in the red, yet the stock price shot up 9.6% in the last 2 days in anticipation. Here's why.
Xero boasts 1.82 million subscribers, a 31% growth year-on-year. Operating revenue is also up 36% and Xero experienced positive free cash flow of $6.45 for the very first time. Average revenue per user (ARPU) rose to $29.25 from $29.13 and customer lifetime value (LTV) rose 3%. Excluding impairments, EBITDA is up a stellar 84% to $91.8 million for the year.
Is this a bad result? No. Headlines are stressing the alarming figure, being Xero's $27.1 million loss. Yet, digging into the product metrics and performance tells a different story. In facing severe competition with America's Intuit, Xero's partnership with Gusto is critical to expanding its SME base in the US so these impairments were necessary.
However, Xero is unprofitable yet based on 2020 earnings, it's expected to be trading on a 196x multiple. With such a high PE ratio, investors are expecting nothing shy of perfect.
WiseTech
WiseTech's flagship product, CargoWise One, is an end-to-end software solution for the logistics industry. It enables seamless interactions between users along the freight chain, and now services over 8,000 businesses across 130 countries.
For the last five years, WiseTech has boasted impressive metrics – a 99% recurring revenue rate and a customer attrition rate of below 1%. Its product is sticky with little to no criticism of the underlying business.
The company recently raised $300 million via a share purchase plan, fuelling its numerous acquisitions this year. Recently, it acquired Xware for $12 million. This Swedish company is a leading messaging integration solution with customers that include government bodies like Stockholm City Council and Swedish Armed Forces, and other companies in various industries such as IT, healthcare and logistics. I believe its acquisition strategy is an effective means of bypassing setup operations and licensing in new markets. This allows WiseTech to scale aggressively.
WiseTech is easily one of the most expensive tech companies in the world with a 137x, but I'm confident in its future success in penetrating new markets.
If these high-flying tech stocks aren't for you, perhaps you should take a look at this growing vertical instead.
