I think that ASX tech shares would be a great place to invest $1,000 into a portfolio right now.
Technology companies have some really strong advantages compared to typical industrial businesses. They can produce high profit margins and expand very quickly because software can be replicated for very little cost. That means they can rapidly grow profit, which usually equates to good share price performance.
Here are two ASX tech shares I’d gladly buy with $1,000 today. They are actually the same two ASX shares I wrote about a year ago and continue to look like strong opportunities.
Redbubble Ltd (ASX: RBL)
Redbubble is an ASX tech share which is an online marketplace company for selling artist products including wall art, phone cases, masks and so on.
It’s the type of business that benefits strongly from network effects. It’s already built the e-commerce platform, so selling more products will strongly help cashflow and profit.
The company is growing at a fast rate. In the first quarter of FY21 the company reported marketplace revenue growth of $147.5 million which represented growth of 116%. Gross profit soared 149%.
It was two other metrics that were the most pleasing in my opinion. The ASX tech share generated $22.1 million of earnings before interest and tax (EBIT) and operating cashflow of $27.1 million (up 165% compared to the prior corresponding period).
I think the above numbers show that Redbubble has now reached a very pleasing profitability phase. The fact that gross profit grew so much faster than revenue shows that its margins can keep increasing at a solid rate.
As the one of the largest artist website businesses in the world, Redbubble can attract the most potential customers, which then attracts more potential sellers and so on. It’s a very helpful cycle.
There’s still plenty of growth potential because of the global shift to online shopping. Redbubble can steadily open new product lines as well, which will increase its potential market.
Its balance sheet looks solid with $85.4 million of cash at 30 September 2020.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is another ASX tech share that is looking like a really strong growth candidate in my opinion.
It facilitates digital giving, which is very useful in this era of COVID-19 social distancing and restrictions. Its main client base is large and medium US churches. Pushpay provides them with an app to connect with its congregation. Livestreaming functionality is particularly helpful.
The company is seeing enormous growth. In FY20 it grew revenue by 32% and its total processing volume rose by 39%. I think the company can continue to generate good double digit growth for many years to come.
Indeed, in FY21 alone the company is expecting to at least double its earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF) to a range of US$50 million to US$54 million.
As I mentioned in my introduction, one of the most attractive things about ASX tech shares is how quickly their profit margins can grow. In FY20 Pushpay saw its gross profit margin improve from 60% to 65%. It also saw its EBITDAF margin grow from 17% to 22%. This will mean that more revenue falls to the bottom line in the coming years.
Pushpay is actually aiming for US$1 billion of revenue from the large and medium US church sector. If the ASX tech share achieves that goal then it would be substantially more profitable later this decade compared to FY20.
At the current Pushpay share price it’s trading at 41x FY21’s estimated earnings. But I think there’s more growth to come.
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Returns as of 6th October 2020
Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX. 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.