Certain ASX tech shares have extremely impressive business models and could grow their profits substantially in the coming years.
I think investors should want to own the best companies on the ASX, but the main issue is the valuation of these amazing stocks. The market is fully aware of how good these businesses are and how strongly their profit could climb in the coming years.
That's why I think it's worthwhile putting them on our watchlist so that we can pounce when we think it's time. For some people, the time to buy may be today. But we've also seen times (such as 2022 and 2023) when share prices and price-earnings (P/E) ratios reduce.
Don't get me wrong, I don't mind paying a higher P/E ratio for some companies. I bought one of the below stocks for my own portfolio when the share price dipped amid its attempt to buy a UK competitor, but it still had a high valuation at the time. It has risen more than 20% since my investment.
REA Group Ltd (ASX: REA)
I was referring to REA Group's attempted takeover of Rightmove, which ultimately rejected the approaches by the ASX share.
I decided to buy shares because of the company's extremely strong business model with its realestate.com.au website. It's the clear real estate portal in Australia, which attracts the most vendors and the most interested buyers. It's a very strong cycle. Having that position allows the business to charge a sizeable amount for property advertisement listings and implement price increases.
Having a digital model means the ASX tech share can deliver operating leverage. It has already built its portal and just needs to benefit from growing revenue and ensure expenses don't grow as fast.
I'm also very excited by the company's potential to succeed in India, which has a huge population and is rapidly adopting digital tools. In the first quarter of FY25, REA Group reported its Indian revenue grew 42% year over year, and total revenue increased 21% to $413 million.
According to the forecast on Commsec, it's trading at 66x FY25's estimated earnings and 60x FY26's estimated earnings.
TechnologyOne Ltd (ASX: TNE)
TechnologyOne describes itself as Australia's largest enterprise software company. It provides enterprise resource planning (ERP) software for more than 1,300 corporations, government agencies, local councils, and universities.
It's the sort of ASX tech share that can keep growing profit year after year because its software is integral to those businesses and organisations. Customers are very willing to continue paying for their subscriptions and pay more as TechnologyOne invests in improving its offering to customers.
The company is doing well growing globally. For example, during FY24, it reported total annual recurring revenue (ARR) growth of 20% and UK ARR growth of 70%. It aims to have at least $1 billion of ARR by FY30.
TechnologyOne's profit before tax increased 18% in FY24, beating guidance and reaching a profit before tax margin of 30%, up from 29% in FY23. The ASX tech share is aiming to reach a profit before tax margin of at least 35% in the coming years "driven by the significant economies of scale" thanks to the scalability of its software offering.
According to the forecasts on Commsec, the TechnologyOne share price is valued at 57x FY26's estimated earnings and 48x FY27's estimated earnings.
