I believe the tech sector is a fantastic place to look for long term investment ideas. At this side of the market I feel there are a good number of shares that have the potential to generate strong long term returns for investors.
Two ASX tech shares that I think could be strong buys right now are listed below:
ELMO Software Ltd (ASX: ELO)
At the small end of the market you’ll find ELMO. It is a cloud-based human resources and payroll software company. It provides a unified platform to streamline processes including employee administration, recruitment, on-boarding, and payroll. Demand has been growing strongly for its software over the last few years as businesses move to automated platforms. This led to the company reporting annualised recurring revenue (ARR) of $55.1 million and statutory revenue of $50.1 million in FY 2020. This was a 19.7% and 25% increase, respectively, year on year.
Pleasingly, management expects to grow its ARR organically to between $65 million and $70 million in FY 2021. This represents year on year growth of 18% to 27%. Importantly, this does not include the benefits of potential acquisitions ELMO could make over the next 12 months. The company has a cash balance of $140 million and intends to deploy the majority of these funds in FY 2021.
At the large end of the market there’s Xero. It is a global cloud-based business and accounting software provider from New Zealand. It has been an exceptionally strong performer over the last few years and this continued to be the case in FY 2020. For the 12 months, Xero delivered a 30% increase in operating revenue to NZ$718.2 million and a 29% jump in annualised monthly recurring revenue to NZ$820.6 million. This was driven by an increase in its average revenue per user metric and a jump in total subscribers by 26% or 467,000 to 2.285 million subscribers.
And while FY 2021 will have challenges because of the pandemic and its impact on small businesses, Xero’s long term outlook remains very positive. This is thanks to its massive global opportunity, strong pricing power, sticky product, and high quality platform. Combined, I expect them to result in strong earnings growth over the 2020s.
Where to invest $1,000 right now
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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has recommended Elmo Software. 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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