There are some very exciting ASX tech shares that are worth buying and holding until at least 2025.
Technology businesses have a strong operational advantage because the main element of the business is digital. It makes it a lot easier to expand quickly if a business can advertise and sell things digitally. Usually, tech businesses have lower operating costs compared to other industries as well.
COVID-19 has completely changed the world. Technology businesses have seen the adoption of their services brought forward. I think that's good news for top ASX tech shares like these:
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Redbubble Ltd (ASX: RBL)
Redbubble operates two of the leading online artist marketplaces, Redbubble and TeePublic which have over 1 million independent artists. A number of products are sold through the marketplaces including apparel, stationery, housewares, bags, wall art and masks.
The ASX tech share had a really strong FY20. Marketplace revenue grew by 36% to $349 million and gross profit increased by 42% to $134 million. Operating earnings before interest, tax, depreciation and amortisation (EBITDA) grew 141% to $15.3 million and EBITDA rose 358% to $5.1 million.
During the last quarter of FY20, marketplace revenue went up 73%, gross profit rose 88% and the business generated operating EBITDA of $8.4 million.
Redbubble is the type of business that can benefit enormously from network effects. The more artists it attracts, the more options there are available for potential buyers. If there are more buyers then it will encourage more artists to go to Redbubble and stay there. Recurring activity is good for profit margins.
The ASX tech share can expand into new product lines that could attract more growth. Masks was a key growth line after the launch in April 2020.
In FY20 it generated free cashflow of $38 million, compared to an outflow of $0.2 million in FY19. That means at the current Redbubble share price, it's priced at 28x FY20's free cashflow.
Excitingly, Redbubble revealed that July marketplace revenue grew by 132% and it saw similar sales levels in the first two weeks of August on a paid basis.
I'm not expecting the same level of growth all the way to 2025, but I believe Redbubble could keep capturing market share to 2025. It's definitely one to watch in my opinion.
Pushpay Holdings Ltd (ASX: PPH)
I think Pushpay is a very exciting ASX tech share. It's helping large and medium US churches to receive donations from their congregations.
The Pushpay technology allows churches to livestream to their congregations, which is a very useful tool in this COVID-19 era.
FY20 was a very strong year for Pushpay. It grew its total processing volume by 39% to US$5 billion and total customers rose 42% to 10,896.
The company boasted of an annual revenue retention rate of more than 100%, meaning existing customers are contributing more to Pushpay's revenue than before.
The ASX tech share's recent acquisition of Church Community Builder was a smart move in my opinion. It brought together two complementary businesses. Each business can advertise to the other's customer base and Pushpay can take the combined offering to new customers.
I believe that Pushpay could continue to be a market-beating share because of how fast its margins are rising.
At 31 March 2019 its earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF) margin was 9%, it grew to 17% at 30 September 2019 and rose again to 22% at 31 March 2020. In FY20 the gross profit margin rose from 60% to 65%. If this scaling continues as it gets bigger then it could turn into a very impressive business.
I think that Pushpay could be much more profitable by 2025 and that will flow through to profit growth which will hopefully lead to strong shareholder returns.
At the current Pushpay share price it's valued at 35x FY21's estimated earnings.
Foolish takeaway
Both Pushpay and Redbubble are exciting ASX tech shares and I believe they can deliver good returns over the next five years. I particularly like Pushpay at the current price, its profit margins could continue to grow strongly for a number of years as it becomes larger.
