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Key points
- Experts believe that the two ASX tech shares in this article are long-term opportunities
- TechnologyOne is quickly transitioning its clients onto high-margin, attractive software as a service contracts
- Data centre business Nextdc continues to experience strong demand and higher utilisation, which is building its long-term earnings potential
Plenty of ASX tech shares have been sold off in recent weeks and months. There could be several opportunities to jump on for investors.
However, which businesses are good ones to pursue? Some of Australia's leading analysts have had their say on some quality technology companies. These two have been named as buys:
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a leading tech business, it's the largest enterprise software company on the ASX.
This business provides a global software as a service (SaaS) enterprise resource planning (ERP) solution that helps businesses. The software can be used anywhere and is reportedly easy to use. Over 1,200 leading corporations, government agencies, local councils and universities are powered by its software.
TechnologyOne is transitioning its clients onto recurring software as a service (SaaS) contracts. The company said this revenue stream is "exceptionally high" because of the recurring nature, combined with a very low churn rate of around 1%.
In FY21, the ASX tech share's total annual recurring (ARR) was $257.6 million, up 16%. It's on track to hit its target of $500 million by FY26. By FY24, it's expecting to be growing its total revenue by more than 15% per annum.
Profit margins continue to rise, helping the bottom line. The profit before tax margin increased to 31%, up from 28% in the prior year. It's expecting this to reach higher than 35% in the coming years, thanks to significant economies of scale from its SaaS offering.
TechnologyOne says it's on track to double the size of its business in the next five years.
It's currently rated as a buy by Morgans with a price target of $13.73. That's more than 30% higher than where it is right now.
Nextdc Ltd (ASX: NXT)
Nextdc is a leading data centre provider. It says it's building the infrastructure platform for the digital economy, delivering the critical power, security and connectivity for global cloud computing providers, enterprise and government.
Demand is quickly growing for its data centres. At the end of January 2022, it said that after recent customer wins, contracted utilisation (excluding options and reservations) has increased by around 5.5MW since the end of FY21 to around 81MW at 31 January 2022.
Revenue for most of the new contracted capacity is expected to be recognised from FY23 onwards after completion and commissioning of the associated data halls.
The ASX tech share says that the sales pipeline remains robust, with the company seeing the strong sales momentum carrying forward into the second half of FY22. It continues to invest in more digital infrastructure to support the new contracted capacity which will turn into annuity-style economic returns over the long-term for investors.
Third generation 'hyperscale' data centres, M3 and S3, are expected to be brought into service at the end of FY22.
The Nextdc share price has fallen 20% in 2022.
Citi thinks Nextdc is a buy, with a price target of $15.40. That implies a potential increase of around 50% over the next 12 months. The broker likes the amount of demand and development progression that the company is seeing. Asian expansion could also be getting closer.
