ASX tech shares with strong growth potential are exactly the sort of companies I want to own in my portfolio. Undervalued ASX software stocks have the ability to outperform.
Technology is a good sector because of the intangible nature of software – it's very inexpensive to grow with another subscriber or client. Compare that to a piece of furniture – it must be made, shipped to Australia/the shop, stored, and then delivered to the customer.
With that in mind, here's why I think these two ASX tech shares are appealing.
Frontier Digital Ventures Ltd (ASX: FDV)
This company describes itself as a leading owner and operator of online classifieds marketplaces in fast-growing emerging regions. The three regions are Latin America, the Middle East and North Africa, and Asia.
The ASX share works alongside local management teams across property, automotive and general classifieds.
Frontier Digital Ventures says there is an opportunity to generate "significant revenue from facilitating transactions". It suggests there are lower levels of trust between buyers and sellers, so online marketplaces can formalise the local property and automotive industries.
In the fourth quarter of 2023, the ASX software stock reported group operating revenue of $21.7 million, earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.1 million and the fourth consecutive quarter of positive operating cash flow.
This investment may not perform as strongly as established competitors such as REA Group Limited (ASX: REA), SEEK Limited (ASX: SEK) and CAR Group Limited (ASX: CAR), but it's playing on the same sort of themes and digitising tailwinds.
2023 has been the best year for its EBITDA and cash flow, yet the Frontier Digital Ventures share price is 40% lower than where it was a year ago and 15% lower than at the start of 2024. I think it's looking very good value.
Bailador Technology Investments Ltd (ASX: BTI)
Bailador describes itself as a growth capital fund that's focused on the IT sector. It usually invests between $5 million to $20 million in unlisted businesses that the investment team think have a lot of growth potential.
The team typically selects holdings with a number of characteristics: they are run by the founders, have been in operation between two to six years, have a proven business model with attractive unit economics, have international revenue generation, a huge market opportunity and the ability to generate repeat revenue.
Bailador's investments include Siteminder Ltd (ASX: SDR), RC TopCo (which owns Rezdy, Checkfront and Regiondo), Access Telehealth, Rosterfy, Nosto, Mosh and Straker Ltd (ASX: STG).
Over the three years to 31 January 2024, its portfolio return averaged 13% per annum.
The business also pays an attractive dividend yield, which is a way for shareholders to receive returns without having to sell their shares.
The Bailador share price is trading at an 18% discount to its stated January 2024 post-tax net tangible assets (NTA).
