The Motley Fool

1 ASX 100 tech share I’d buy and hold beyond 2023

ASX tech share Altium Limited (ASX: ALU) has had great run over the past 12 months, with the Altium share price rising from $24.95 this time in 2019 to today’s price of $39.87 per share, a very impressive gain of 59.80%.

It is also a member of the WAAAX tech share consortium, alongside Xero Limited (ASX: XRO), Appen Ltd (ASX: APX), Afterpay Ltd (ASX: APT) and WiseTech Global Ltd (ASX: WTC).

So, what does Altium do?

Altium designs and utilises software which enables engineers to design printed circuit boards (PCBs) for a broad range of electronic devices, from computers to cars, and an increasing number of devices that that make up the ‘Internet of Things’.

The software that Altium creates is tightly integrated into these customers’ systems and processes, resulting in high customer switching costs. This helps to give Altium high pricing power and recurring revenue from subscription renewal rates. Altium also has high product margins and operating leverage, all of which makes it a very attractive share to invest in.

Altium is aiming to unify and connect the 3 distinct electronics industry value chains: electronic design, electronic parts and electronic manufacturing. Altium’s ongoing investments include the development of a new cloud platform, Altium 365.

It continues to invest for growth in its key overseas markets of US and China. Innovation is very much key to Altium’s business model, with a significant proportion of profits devoted to further research and development.

Very strong revenue and profit growth

For the financial year ended 30 June 2019, Altium achieved strong revenue growth of 23% to US$171.8 million across all business units and all key regions.

China revenue growth was up by 37%, while its US and Europe, Middle East and Africa segments delivered 14% and 20% revenue growth, respectively. Its initial investment in additional China-based resources appears to be paying off and will allow it to scale up its operations and revenues in the region.

Overall it recorded a 41% increase in net profit after tax to US$52.9 million and an earnings per share growth of 41%. Its earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased significantly from 32% to 36.5%, while operating cash was flow up 42% to US$69.1 million

Revenue guidance for FY20 given by management is in the range of US$205 million to US$215 million, while EBITDA margin is in the range of 37% to 38%. Altium is committed to an aspirational target of achieving 100,000 subscribers by 2025 and a revenue goal of US$500 million in 2025 and expects to reach the halfway mark of 50,000 later in 2020.

Foolish takeaway

I believe that the growing need for electronics through the rise of smart connected devices will see continued strong demand for Altium’s products over the next decade. This in my mind makes Altium a good tech share to buy and hold as part of a diversified portfolio of shares.

Altium is currently trading with a high price-to-earnings ratio of 53.9, however I think that is reasonable for a fast-growing tech share with strong growth prospects.

If you are not convinced on Altium, here's 5 other top shares to consider.

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Phil Harpur owns shares of AFTERPAY T FPO, Altium, Appen Ltd, WiseTech Global, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, WiseTech Global, and Xero. The Motley Fool Australia owns shares of Altium and Appen 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.

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