When we look at what the best-performing investments have been, ASX tech shares are typically at the top of the list.
There are normally a few reasons for that outperformance. It costs little to sell an additional software subscription to a new customer, and thanks to software's intangible nature, the gross profit margins are usually higher for a tech business than for a retail company or bank.
It's also beneficial because software businesses can grow quickly – there are essentially no physical limitations on rapid growth, whereas miners may need to open a new mine to increase production beyond a certain level.
I'll discuss two ASX tech shares that I believe could outperform the S&P/ASX 200 Index (ASX: XJO) over the next five years.
Image source: Getty Images
Xero Ltd (ASX: XRO)
Xero is a cloud accounting business with an impressive market share in New Zealand, Australia, and the UK. It also has a notable presence in a number of countries, including the US, Canada, South Africa, Singapore, and more.
The company is delivering on the growth potential I think it has. The customer churn is very low, suggesting subscribers like the software and that they have little desire to take the time-consuming choice of moving to another accounting provider.
This customer loyalty has allowed Xero to increase prices in certain markets, boosting average revenue per user (ARPU). The company's gross profit margin continues to rise, too, increasing to 89% in FY25, up from 88.2% in FY24.
Xero has already built its cloud accounting infrastructure for subscribers, so a greater proportion of any additional gross profit it makes can flow onto the other profit lines. We saw this in effect with the FY25 result, where operating revenue climbed 23%, net profit after tax (NPAT) climbed 30%, and free cash flow surged 48%.
I'm expecting the ASX tech share to continue growing subscriber numbers, margins, and the net profit as its operating markets become more digitalised and its operating leverage increases.
Siteminder Ltd (ASX: SDR)
Siteminder is a leading software provider to the global industry. Its partner ecosystem generates more than 130 million reservations worth over A$85 billion in revenue for hotel customers annually across 2.4 million rooms.
The company aims to provide a unified revenue platform, which is synchronised and automated for customers, providing "dynamic revenue and distribution controls" and "real-time and comprehensive insights with a clear view of demand for customers".
It is providing new offerings for subscribers that can help with optimising pricing, inventory, and distribution for management. According to Siteminder, more than one-in-three hotels surveyed adjust their rates monthly or less, so Siteminder can play a very useful part in maximising revenue.
The ASX tech share has a goal of reaching annual revenue growth in the medium term while maintaining its profitability.
In FY26, the business is aiming for strong revenue and annual recurring revenue (ARR) growth, as well as higher underlying operating (EBITDA) and free cash flow.
In three years, I believe the business will be much more profitable and valued higher by investors.
