The ASX growth share part of the market has been punished over the last year and a half as investors worried about the effects of inflation and higher interest rates on the underlying value of businesses.
Interest rates can act like gravity on asset valuations – the higher they go, the harder it pulls down (in theory) on share prices.
The share prices of both of the businesses that I'm going to talk about have dropped at least 18% from their peaks in 2021, yet the businesses have a really strong, profitable outlook.
Xero Limited (ASX: XRO)
Xero is a leading cloud accounting software business. The business has done very well at growing into a global business. At the end of September 2022, it had 3.5 million subscribers (which was a 16% rise year over year).
In the FY23 half-year result, Australia saw 126,000 net subscriber additions to reach a total of 1.47 million subscribers. New Zealand saw 24,000 net subscriber additions to reach a total of 536,000, the UK experienced 44,000 net subscriber additions to reach 894,000 subscribers, North America saw 15,000 net subscriber additions to reach 354,000 subscribers and the 'rest of the world' saw 16,000 net subscriber additions to reach 242,000 subscribers.
It's clear that the business is seeing success around the world. I think its time-saving and automation tools will continue to attract new subscribers for years to come.
The business has an extremely high retention rate, which is a good sign that these new subscribers will stay for a long time. It also continues to see a rise in the average revenue per user (ARPU), which rose 13% year over year in HY23.
The ASX growth share has recently committed to becoming more profitable, balancing growth and increasing margins.
By 2030, I think the ASX growth share could be making a very large amount of profit, and I believe this will translate into good shareholder returns for Xero as the market recognises how profitable the underlying business is.
Altium Limited (ASX: ALU)
Altium is an electronic PCB software developer. It also has a few other growing segments, such as Octopart – a search engine for electrical parts.
The company's growth rate slowed during the COVID-19 period, but it has bounced back strongly. In the first half of FY23, it saw revenue growth of 17% and net profit after tax (NPAT) growth of 30% to US$29.6 million. For FY23 as a whole, it's expecting total revenue growth of 15% to 20%.
By FY26, it's targeting total revenue of US$500 million and an underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin of between 38% to 40%. In the HY23 result, the underlying EBITDA margin was 36.2%.
A growing proportion of the company's revenue is recurring revenue, which is good for longer-term profit margins and earnings visibility.
There is a growing amount of advanced electronics in the world, such as cars, robot vacuum cleaners, phones and so on. I think this sets up Altium for long-term future success.
Management is aiming for Altium to become the world's largest 'manufacturer' of electronics but without owning any factories, in the same way that Uber is a taxi company that doesn't own taxis and Airbnb is the world's largest accommodation provider but owns no real estate.
As it grows, I think the business can become even more profitable, have an even more loyal subscriber base and continue to pay growing dividends.
