2 quality ASX tech shares ripe for the picking

You need to be pickier than ever to find the right growth shares to buy. Here are a couple of suggestions from an expert

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With inflation persisting and Reserve Bank stimulus about to fade, it’s more important now than ever to invest in quality ASX shares.

Perhaps the biggest victim out of any rise in the cost of money will be the technology sector, as it has many growth businesses with variable future cash flow.

Fortunately, if you know where to look, there are some ASX tech shares that have rock-solid business models that could withstand worsening macroeconomic conditions.

Medallion Financial Group managing director Michael Wayne named 2 such shares this week:

Cheap ASX tech share perfectly set up for the future

Wayne rates ELMO Software Ltd (ASX: ELO) as a “very high-quality company”.

“They’ve recently had an update to the market, which has been well received and has allayed a lot of the fears out there regarding a pathway to cash-flow positivity,” he told Switzer TV Investing.

“They flagged a 78% increase in their cash receipts.”

Indeed, after losing about 29% since January, the Elmo share price has surged 20% upwards in the past month and closed on Friday at $5.25.

The sticky nature of the business, Wayne forecasts, will push further growth.

“They’re one of these businesses that has very low customer churn rates, the average recurring revenue has been growing very, very quickly over the years,” he said.

“As a customer comes on, they might use one or two of their modules, but over time as they get comfortable… they tend to bolt on more modules as time goes on.”

Elmo shares have a 52-week high of $7.44, reached way back in January.

Wayne has no qualms about the stock price returning to those heights.

“It doesn’t trade on the lofty multiples of many other tech companies, and I think the recent good news could be the impetus to push it back towards that $7, $8 mark — with potential upside from there.”

No one is using less data these days

Network-as-a-service provider Megaport Ltd (ASX: MP1) has already had a great run this year, with its shares pushing almost 39% higher.

“It allows companies to pay-as-they-go in terms of capacity use,” he said.

“When they need a lot of bandwidth or a lot of internet, they can go to Megaport. When they don’t need as much, they can then pull away from that service.”

Wayne recommended his clients buy it back when it was in the low $3s. At Friday’s close, Megaport shares were going for $19.70.

Despite the spectacular rise, he still can’t resist the insatiable demand for its services.

“It’s a very good business, and had a very good update recently as well. They’re now on track to reach that $100 million recurring revenue mark,” said Wayne.

“We’re using more and more data these days and this is one of those businesses that should benefit from that.”

Should you invest $1,000 in ELMO Software right now?

Before you consider ELMO Software, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and ELMO Software wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Tony Yoo owns shares of Elmo Software. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Elmo Software and MEGAPORT FPO. The Motley Fool Australia owns shares of and has recommended Elmo Software. The Motley Fool Australia has recommended MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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