I think ASX tech shares could be the best businesses to buy and hold until 2025.
Technology businesses have a couple of advantages that most other industries don’t have. The main cost for most technology businesses is simply developing the software. Once the software is made it’s very, very cheap to distribute it with low incremental costs. It means a business that can grow fast can rapidly increase its operating profit margins.
If a business has a large total addressable market then its profit has a much longer growth runway. It’s the ASX shares with international growth which are more likely to do well over time.
However, there are some ASX tech shares like Altium Limited (ASX: ALU) and Appen Ltd (ASX: APX) which are quality but are priced very highly. But there are other ASX tech shares which are priced much more reasonably:
Tech share 1: Citadel Group Ltd (ASX: CGL)
Citadel is a software business which provides essential software to various sectors including education, defence and healthcare. With government organisations being some of its major clients, Citadel has quite defensive earnings.
Indeed, in the company’s COVID-19 update on 24 March 2020 it said that no significant projects or contracts have been delayed or cancelled.
I think the acquisition of Wellbeing could be transformative for Citadel. Wellbeing is a UK healthcare software company that manages patient workflow with recurring revenue being around 70% of its total revenue. Both Citadel and Wellbeing have major private and government clients.
In Australia, Citadel has a 42% market share of the pathology sector and a 27% market share of the oncology sector. In the UK, Welbeing has a 59% market share of the radiology sector and a 22% market share of the maternity sector. These are strong market positions for the ASX tech share to have.
Not only is the earnings of Wellbeing defensive and high-quality, but it opens up the opportunity for cross-selling each software into the other country.
For the overall business, Citadel’s recurring revenue as a percentage of total revenue grows from 41% to 48%. Its health software gross profit will increase from 31% to 52% of overall gross profit and the earnings before interest, tax, depreciation and amortisation (EBITDA) margin will rise from 22% to 26%. Higher margins are very attractive for the ASX tech share.
At the current Citadel share price it’s trading at 12x FY22’s estimated earnings.
Tech share 2: Pushpay Holdings Ltd (ASX: PPH)
Pushpay is a software business which facilitates digital giving to not-for-profits. Currently, its main client base is large and medium US churches.
The ASX tech share is seeing enormous growth at the moment due to the current COVID-19 conditions. In FY20 the company saw revenue grow by about a third to US$129.8 million. In FY21 Pushpay is expecting that EBITDAF (the F stands for foreign currency) can at least double to US$50 million.
Aside from the strong revenue growth potential, one of the main reasons why I really like Pushpay is that its gross margin could keep increasing. In FY20 alone it rose from 60% to 65%. That means more revenue falls to the bottom line.
Pushpay offers churches a livestreaming to connect with its congregation. It’s these types of tools which make Pushpay attractive to its clients.
I think the ASX tech share has a lot of growth potential. It’s aiming for annual revenue of US$1 billion from the US church sector.
Over the long-term, Pushpay could target churches outside of the US or different religions in the US. Other markets would dramatically increase Pushpay’s total addressable market – though it already has a large market to target.
At the current Pushpay share price it’s trading at under 30x FY23’s estimated earnings and 33x FY22’s estimated earnings.
I think both of these ASX tech shares are among the best ideas to beat the overall ASX over the next five years. Citadel looks very good value today and I believe that Pushpay can continue to grow strongly with its rising profit margins.
These 3 stocks could be the next big movers in 2020
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Tristan Harrison owns shares of Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Citadel Group Ltd and 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.