The technology sector could be the best way for regular investors to become wealthy.
There are good reasons why shares such as Qantas Airways Limited (ASX: QAN) and BHP Group Ltd (ASX: BHP) trade at such low multiples of their earnings. Their earnings are unlikely to grow at a fast pace for a sustained period of time.
I think it can be a mistake to just focus on the price/earnings ratios of businesses to say which is cheap and which is expensive.
Technology businesses have lower variable costs than most other sectors. Once the product or service is developed it can be quickly and cheaply rolled out. That’s why I’m attracted to these two tech shares that could rapidly grow profit:
Redbubble Limited (ASX: RBL)
Redbubble is the owner of two online marketplaces that sell artist-produced products like clothing, wall art and so on.
The company is quickly growing revenue with a rise of marketplace revenue of 43% to $70 million in the first quarter of FY20.
Operating leverage is really coming through now with the gross profit margin increasing 1.5% to 37.9%, earnings before interest, tax, depreciation and amortisation increasing by $4 million to $2.2 million and free cash flow of $7.8 million which was a rise from the $0.4 million result in the first quarter of FY19.
What the above says to me is that Redbubble has attractive economics that could see profit quickly rise higher over the coming years if revenue keeps going up.
Altium Limited (ASX: ALU)
Altium is the business behind some of the world’s best electronic PCB software.
The company has been impressing the market with its results for a number of years now. FY19 was no exception with revenue growth of 23%, EBITDA growth of 40%, net profit growth of 41% and operating cash flow growth of 42%.
Altium is highly aligned to the growth of technology in the world with a large number of market-leading customers including Tesla, John Deere, Space X, Boeing, Siemens, Google, Amazon, Apple, Microsoft, Disney, Qualcomm, Broadcomm, CSIRO, Bosch and Proctor & Gamble.
Management are aiming for clear market leadership over the next several years which would see a lot of the growth of the Internet of Things flow to Altium.
I believe Altium could be on its way to being a ASX blue chip tech share, but Redbubble may be able to generate more shareholder returns over the next two to three years because of how much smaller it is. However, I’d choose Altium out of the two because it seems to be high-quality in every department.
We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.
And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!
*Extreme Opportunities returns as of June 5th 2020
Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended REDBUBBLE FPO. 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.