ASX shares can be a great way to grow your wealth over the long-term.
Investing in quality businesses for the long-term can produce great results if you pick correctly.
No ASX share is guaranteed to generate strong capital growth, but I think these ideas could be some of the ones to potentially beat the market over the next decade:
Share 1: Altium Limited (ASX: ALU)
Altium is a leading electronic PCB software business. It is already one of the biggest players in the market and it’s aiming for clear market dominance by the middle of this decade. Altium’s management are aiming for 100,000 Altium Designer subscribers by 2025, which should help reach the revenue goal of US$500 million.
The ASX share wants to keep growing its earnings before interest, tax, depreciation and amortisation (EBITDA) margin as economies of scale benefit the business. Software businesses have an advantage because their software can be easily replicated and distributed for little cost. In the FY20 half-year result Altium reported an EBTIDA margin of 39.7%, up from 38.8%.
I believe Altium is a great business for a number of reasons. I’ve already mentioned the growing profit margins. It’s debt free with a growing cash balance. Altium has been paying a growing dividend. I also like that Altium is growing revenue in multiple regions.
The world is becoming increasingly technological, so Altium’s service will be even more important to its clients. The ASX share’s current client list includes Tesla, Space X, NASA, Google, Siemens, Microsoft, NEC, Belkin, HP, Amazon, Fitbit, Disney and Qualcomm.
Share 2: Pushpay Holdings Ltd (ASX: PPH)
Pushpay is an ASX share which specialises in facilitating electronic donations to not-for-profits. It’s getting a lot of success from the large and medium US church sectors with their large congregations.
Over the long-term the ASX share is targeting US$1 billion revenue, which represents 50% of the medium and large US church segments. In FY20 the company made US$129.8 million of operating revenue. There is a lot of potential growth left.
I think the Church Community Builder acquisition was a wise one. The two businesses launched a joint product offering in April 2020. Pushpay wants to be able to offer the best-in-class church management system and the best community app.
In FY20 the company generated US$25.1 million of earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF). In FY21 management has guided EBITDAF will be between US$48 million to US$52 million. That would be a strong year of growth!
One of the most attractive things to me about Pushpay is about how scalable it is. In FY20 it increased its gross margin by five percentage points from 60% to 65%. I expect the gross margin can keep going up as the ASX share heads towards US$1 billion of revenue.
Share 3: Xero Limited (ASX: XRO)
Xero is another ASX share with excellent growth potential. It’s a cloud accounting software business which provides its service in several countries including Australia, New Zealand, the UK and the US.
Xero’s gross profit margin is very attractive. It increased from 83.6% in FY19 to 85.2% in FY20. Every new subscriber means a lot of the revenue also turns into more gross profit.
The tech ASX share is still heavily investing for growth, yet the 30% increase in operating revenue in FY20 resulted in a 52% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$139.2 million.
Xero also finally achieved a profit in FY20. Its net profit was NZ$3.3 million and free cashflow increased by 320% to NZ$27.1 million.
The software business continues to grow its subscriber numbers. I think it can add many more over the next decade. In FY20 alone it added 467,000 net subscribers. Each new subscriber is another business paying attractive monthly revenue to Xero.
I think more business owners will choose Xero’s service this decade for the time-saving tools and automation.
In my opinion, all three of these ASX shares are some of the best on the ASX. At the current prices I’d probably go for Pushpay because it has a longer growth runway and its profit margins are rising the fastest. Altium and Xero are great businesses, but I’d prefer to buy them both for around 10% cheaper than what they’re trading at today.
Where to invest $1,000 right now
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Tristan Harrison owns shares of Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium, PUSHPAY FPO NZX, and Xero. The Motley Fool Australia has recommended PUSHPAY FPO NZX. 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.