Here’s why I think these ASX tech shares are buys in June

Therse two tech stocks look like quality ideas to me during this period of uncertainty.

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Key points

  • In my opinion, there are some high-quality ASX tech shares that now look good value
  • Xero is one of the world’s leading cloud accounting businesses
  • REA Group owns Australia’s leading property portal business, called realestate.com.au

I think there are some great ASX tech shares that are now good value following the significant volatility that the market has seen in recent times.

While a business isn’t necessarily a buy just because it has fallen, I believe the two technology investments below could now be very promising for the long term at the current share prices.

Xero Limited (ASX: XRO)

Xero is a leading global cloud accounting software company. I believe it is one of the strongest businesses on the ASX and possibly among the best in the world at what it does.

The ASX tech share is heavily pursuing growth. Despite having a gross profit margin of 87.3%, the business only made free cash flow of $2 million in FY22. That’s because it’s spending enormous amounts on marketing, product design, and development. FY22 marketing costs were $405.7 million, while design and development costs amounted to $372 million.

One way that Xero is developing new ways to engage with customers has been the recently announced partnership with FIFA Women’s Football. In terms of market development, Xero is working on product localisation in a number of international markets and future innovation in areas such as platform, ecosystem, and acquisitions.

The company continues to grow subscriber numbers strongly. Total subscribers increased by 19% over FY22.

I think the 44% decline of the Xero share price in 2022 makes it very compelling for the long-term.

REA Group Limited (ASX: REA)

REA Group is another of the highest-quality businesses on the ASX, in my opinion.

But, the owner of realestate.com.au has been savaged like many other ASX tech shares in 2022. The REA Group share price has fallen by almost 40% in 2022.

It is possible that the property market could go through difficulty as interest rates shoot higher as the Reserve Bank of Australia (RBA) tries to get on top of inflation. A subdued property market isn’t a positive for REA Group.

However, I think this much lower valuation reflects a lot of those potential future impacts. To put things in perspective, it has now fallen approximately the same amount that it did during the COVID-19 crash of February and March of 2020.

I believe the business has a compelling future. I’m not expecting that it can capture much more market share. It’s already the market leader according to the site visits that it regularly boasts about to investors.

For me, there are three areas that make me optimistic about this ASX tech share, aside from the lower valuation.

The first thing is that it can keep implementing good price increases for its property advertising services. Sellers will want to be on the best property portal to ensure the best chance of a good sale, particularly in a difficult market for sellers. However, REA Group’s advertising charge is relatively small compared to the overall sale price of a property.

Second, REA Group is looking at diversifying its business into areas like financial services and data. It now has a sizeable mortgage broking segment after the acquisition of Mortgage Choice.

Finally, I think the ASX tech share has a long-term opportunity in international markets such as the US, India, and other Asian countries where REA Group has investments in leading property sites. Those international sites are not generating useful profit yet, but they are setting the foundation for potential growth as they invest. They can also benefit as more of the local populations turn to digitally searching for real estate.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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