True blue tech: The ASX shares I'd buy to build a Nasdaq index-inspired portfolio

Tech can be a great sector to own for growth.

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The ASX tech share space has been a wonderful place to find high-performing businesses. There are some great companies on the ASX, and owning enough of them could make them look like a Nasdaq-style portfolio.

The Nasdaq is a US stock exchange that has a relatively high number of US tech and tech-related businesses involved.

The ASX isn't known for having large tech businesses like Microsoft, Apple, Alphabet and Amazon.com in the US.

But, after years of strong growth, there are some sizeable ASX shares that I'd pick for a Nasdaq index-style portfolio.  

How I'd narrow down the picks

Investments that track indices don't necessarily try to make a judgment call. When investors buy the Betashares Nasdaq 100 ETF (ASX: NDQ), they aren't necessarily making a valuation call on any individual business. Instead, it's a call on whether the whole group of companies can collectively keep doing well.

Most ASX tech shares certainly aren't trading on a cheap valuation, in terms of not having a low price/earnings (P/E) ratio.

Plenty of tech-based businesses can achieve a higher-than-average gross profit margin (because of the intangible nature of software), which means revenue growth can lead to a lot more profit growth than an industrial business could achieve.

There are a number of things I'd look for with these ASX tech shares. First, I'd want to see those businesses have good profit margins.

I would want those ASX tech shares to have international growth revenue potential because that opens up a lot more growth beyond Australia's shores.

Ideally, those companies are growing revenue at a solid pace, or have the potential to grow revenue at a strong speed in the future.

Plus, I'd hope to see those businesses have good balance sheets with manageable (or no) debt.

My preferred ASX tech shares

Four of the best ones that spring to mind are electronic PCB design software company Altium Limited (ASX: ALU), medical imagining software company Pro Medicus Ltd (ASX: PME), real estate portfolio business REA Group Limited (ASX: REA) and logistics software company WiseTech Global Ltd (ASX: WTC). I think all of these ASX tech shares would be at home in the Nasdaq Index.

I think the above four are among the highest-quality companies on the ASX.

If I were to expand the list to a few more names, I'd include TechnologyOne Ltd (ASX: TNE), Xero Limited (ASX: XRO), Webjet Limited (ASX: WEB), Siteminder Ltd (ASX: SDR) and Audinate Group Ltd (ASX: AD8).

Many of these stocks have performed strongly over the last six to 12 months. I'm not expecting the next 12 months to be as strong, but the underlying business results could be compelling, particularly if they can keep growing strongly overseas.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has positions in Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Altium, Amazon, Apple, Audinate Group, BetaShares Nasdaq 100 ETF, Microsoft, Pro Medicus, REA Group, SiteMinder, Technology One, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended Audinate Group, BetaShares Nasdaq 100 ETF, SiteMinder, WiseTech Global, and Xero. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Pro Medicus, REA Group, and Technology One. 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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