Some S&P/ASX 200 Index (ASX: XJO) tech shares might be worth a spot in a portfolio looking for long-term growth.
Tech businesses have the potential to realise good profit margins because of the relatively cheap nature of delivering software to clients.
Revenue growth can lead to good profit growth over time.
These are two ASX 200 shares that could be worth looking into:
Netwealth Group Ltd (ASX: NWL)
Netwealth is a business that’s rated as a buy by the broker Macquarie Group Ltd (ASX: MQG). It has a price target on Netwealth of $18.25, which suggests an increase of more than 10% over the next 12 months, if Macquarie is right.
The broker points out that things are looking good for Netwealth with good inflows and good conditions in the investment world. However, one negative is going to be a falling amount of interest it earns on cash held by Netwealth.
Netwealth is a financial services company that provides multiple services such as superannuation (including accumulation and retirement income products), investor directed portfolio services, managed accounts and managed funds.
A couple of weeks ago, the fintech business announced record annual net inflows of $9.8 billion as funds under administration (FUA) exceeded $47 billion. That $47 billion was an increase of $5.3 billion (or 12.7% in percentage terms), including market movement of $2.2 billion from the prior quarter. It was also an increase of $15.6 billion (49.6%) against the prior corresponding period.
The ASX 200 tech share’s FUA net inflows of $3.1 billion for the quarter ending 30 June 2021 was an increase of 102% year on year.
Funds under management (FUM) net inflows were $0.8 billion for the quarter, including $0.7 billion of managed account net inflows.
According to Macquarie, the Netwealth share price is valued at 60x FY22’s estimated earnings.
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a business that provides a global software as a service (SaaS) enterprise resource planning (ERP) solution. Its offering its about providing software that accessible on any device, anywhere at any time and aims to be very easy to use.
More than 1,200 corporations, government agencies, local council and universities use the software.
The ASX 200 tech share has been winning contracts in the government sector. For example it was chosen by the Australian Department of Agriculture, Water and the Environment to streamline and modernise the operations. Management said this was a significant win against SAP (a European software business).
It continues to invest significantly in extending the functionality and capabilities of its software.
At the time of its half-year result, more than 85% of its revenue was recurring subscription revenue. It’s expecting profit to grow by double digits in FY21.
Over the longer-term, it’s expecting to increase penetration with existing customers, add new customers and expand globally. Over the next few years, its SaaS and continuing business is expected to grow by more than 15% per annum.
It expects its total annual recurring revenue (ARR) to grow to more than $500 million by FY26, from the current base of $233 million. Economies of scale should lead to its continuing profit before tax margin expanding to 35%.
The ASX tech share is currently rated as a buy by Morgans with a price target of $10. It believes TechnologyOne shares are valued at 43x FY22’s estimated earnings.