ASX tech shares may be the place to look for faster-than-average profit growth because of the ability to grow revenue and margins at a quicker pace than typical industrial businesses due to the intangible nature of software.
Some tech businesses are expecting a lot of growth over the next decade, and have already experienced a substantial increase in size over the last five years.
Here are three ASX tech shares that are growing quickly:
VanEck Video Gaming and Esports ETF (ASX: ESPO)
This is an exchange-traded fund (ETF) that is based on the e-sports and video gaming industry.
It had a total of 26 positions at the end of September 2021. Some of its holdings are tech giants, some are hardware manufacturers and some are game developers. You may have heard some of the top ten holdings: Nvidia, Tencent, Advanced Micro Devices, Sea, Nintendo, Activision Blizzard, Netease, Electronic Arts, Bandai Namco and Take-Two Interactive Software.
The revenue of the gaming sector has been growing revenue at a double digit pace for years and it could continue to do so as non-Western regions spend on video gaming content as well as watching it.
E-sports continues to grow in popularity and is creating various earnings streams for the companies involved, including fees, advertising and so on.
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a large ASX tech share that provides enterprise resource planning (ERP) software.
The company is currently transitioning its clients to a software-as-a-service model (SaaS). It’s seeing rapid growth, with the recent FY21 half-year update showing SaaS annual recurring revenue rising by 41% to $155.8 million. The company’s HY21 profit before tax increased by 44% to $37.3 million.
Over the long-term it’s expecting “strong” growth driven by its global SaaS software as it increases its usage with existing clients, wins new clients and expands globally.
Over the next few years, management are predicting that its SaaS and continuing business is expected to grow by approximately 15% per annum, once it has wound down its legacy licence fee business. It also sees its total ARR increasing to more than $500 million by FY26m from the current (at the time) base of $233 million.
The company is expecting that economies of scale from its global SaaS ERP software will help its profit before tax margin increase to 35%.
The ASX tech share recently expanded its business with an expected £12 million acquisition of Scientia Resources Management, a UK company that services the higher education sector.
TechnologyOne is currently rated as a buy by the broker Morgans, though the price target is currently $10.
Hub24 Ltd (ASX: HUB)
Hub24 is a fintech business that provides platforms for financial advisers and their clients with a range of investment options with managed portfolios, as well as leading transaction and reporting functionality.
The core business is growing quickly. At 30 September 2021, its funds under administration (FUA) had grown to $63.2 billion, with the platform FUA rising to $45.4 billion – that was an increase of 139% year on year and 9.5% quarter on quarter. This was helped by platform net inflows of $3 billion.
Its new business pipeline continues to grow, with 30 new license agreements signed during the first quarter of FY22.
The ASX tech share also plans to expand its business and win more clients with the acquisition of Class Ltd (ASX: CL1). Class shareholders will get 1 Hub24 share for every 11 Class shares they have, plus $0.10. It is expected that the deal will deliver increased value, efficiency and product solutions for both existing and new customers. The deal is expected to add 8% to underlying earnings per share (EPS).
Hub24 is currently rated as a buy by the broker Credit Suisse, with a price target of $36.50. Credit Suisse thinks that it can offer good cross-selling potential between the two businesses.
According to Credit Suisse, the Hub24 share price is valued at 57x FY23’s estimated earnings.