The two S&P/ASX 200 Index (ASX:XJO) tech shares in this article are quality businesses, including Technology One Ltd (ASX:TNE).
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There are a handful of quality S&P/ASX 200 Index (ASX: XJO) tech shares that could be worth looking at.
Businesses with good margins, large addressable markets and long-term growth plans may have the potential to make good returns:
Altium Limited (ASX: ALU)
The Altium share price is down 24% since 9 November 2020 with COVID-19 impacts continuing to hurt the electronics PCB software business.
However, a lower share price gives investors the opportunity to buy at a cheaper level for the long-term.
Despite the shorter-term issues relating to pricing and China, the ASX 200 tech share has plans to reach market domination in the coming years.
A key part of those plans is Altium 365, its cloud offering. There is strong adoption of Altium 365 as it continues to add clients. At the time of the release of the half-year result a couple of months, it had 9,300 active monthly users and 4,400 monthly active accounts.
The Altium CEO Aram Mirkazemi said:
Altium 365 is key to our future success through indirect monetisation from our CAD software tools and, in time, direct monetsation from the broader ecosystem. I am most heartened by the strong adoption of Altium 365, and with our Netflix organisational changes behind us, I am confident of a much stronger second half. Early signs are positive for this.
Over the longer-term, Altium is expecting to generate a higher earnings before interest, depreciation and amortisation (EBITDA) margin in the coming years which will help grow the bottom line.
At the current Altium share price, it’s trading at 48x FY23’s estimated earnings.
Technology One Ltd (ASX: TNE)
Technology One is currently rated as a buy by Morgans with a price target of $9.99.
The ASX 200 tech share is currently shifting to a software as a service (SaaS) model which should lead to higher-quality revenue as well as good margins. In FY20 its churn was below 1%.
Technology One says that its global SaaS enterprise resource planning (ERP) solution is delivering a compelling value proposition for customers, providing them any device, any time access from anywhere around the globe as well as a cost-effective way to run their enterprise.
It continues to win new, large enterprise customers from competitors. It has added 104 enterprise customers to its global SaaS ERP solution. Technology One now has 539 large scale enterprise customers, with hundreds of thousands of users. It’s the largest provider in Australia.
FY20 saw its total annual recurring revenue (ARR) hit $222 million and is set to exceed $500 million in the coming years. The ARR stands at 86% of total revenue which means the majority of revenue is locked-in at the start of the financial year which positions it well to achieve growth in FY21.
Despite all the impacts of COVID-19, Technology One achieved growth in the 12 months to 30 September 2020. Underlying profit before tax went up 13% to $86.1 million and SaaS ARR rose 32% to $134.6 million. Cashflow generation from the ASX 200 tech share increased 49% to $66.4 million.
According to Commsec, the Technology One share price is valued at 32x FY23’s estimated earnings.
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Tristan Harrison owns shares of Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.