Why these 3 ASX 200 tech shares offer great value

ASX 200 tech shares have offered great returns to shareholders over recent years. This comes as the marketplace moves from brick-and-mortar businesses to online, and more and more people are using technology in almost every area of life. Technology companies are often known for their ability to deliver huge earnings growth, something that companies in other sectors cannot always provide.

While the S&P/ASX 200 Index (ASX: XJO) is down 19.69% from highs reached in February, the S&P/ASX Information Technology Index (ASX: XIJ) is down just 5.67% in the same period. The newcomer, S&P/ASX All Technology Index (ASX: XTX), is down 2.17% since it launched in late February. This reflects the positive market sentiment towards technology companies and their ability to continue their growth during difficult economic times.

Technology companies often rely on changing consumer trends to drive their growth. Frequently, as a technology gains traction it has a rapid uptake by consumers and can quickly achieve huge market penetration. These technology shares have proven their capabilities and made it into the index of Australia’s biggest 200 companies. They also offer great value to shareholders.

Afterpay Ltd (ASX: APT)

Afterpay is a financial technology company offering payment solutions to consumers. It operates in the United States, the UK, Australia and New Zealand. Afterpay recently hit new highs as it announced that it had reached 5 million US customers, a proud boast for any Australian company. This takes the total customers signed onto Afterpay’s platform to nearly 9 million worldwide. The company has an average transaction value of $150. This suggests that there is plenty of room for Afterpay to derive profits from transactions. Its net margin from payments sits at around 2.1% (this is the amount Afterpay derives from its transactions after paying the costs of those transactions).

While Afterpay is currently turning a loss, this is not abnormal for a technology company in its growth phase. Currently, customer growth is soaring. For the first half of financial year 2020, customer growth was up 134% compared to the first half of 2019. Underlying sales were up a massive 109%.

In Q3 of the 2020 financial year, however, Afterpay processed $2.4 billion in sales for merchants. This was a massive 354% increase over the same period in 2019. Its payment platform is now offered or in the process of being offered by more than 15,000 brands and retailers. If Afterpay can continue to grow at this rate, it will soon be a well-established international market leader in consumer financing.

Altium Limited (ASX: ALU)

Altium is a software company that provides solutions for engineers in circuit board design. Demand for Altium’s cloud-based design software is growing rapidly. The company boasts that its software allows engineers to work from anywhere and connect to anyone.

Altium is fast becoming a market leader in engineering software and has a solid balance sheet with healthy cashflow. The company previously announced that it expects earnings of around US$200 million in financial year 2020. It has since stated that weakness in the final quarter of the financial year will partly reduce expectations.

Altium also announced that it is moving toward high volume online sales, which will support revenue. It is also offering lower pricing and extended payment terms to customers during the current economic downturn. The company aims to attract 100,000 subscribers by 2025, which will provide revenue of an estimated US$500 million. In FY19, revenue was US$171.8 million and the company paid a dividend of 34 Australian cents.

Xero Limited (ASX: XRO)         

Xero is a New Zealand-based software company listed on the ASX. It provides cloud computing accounting software for small to medium size businesses. As at 31 March 2020, the company had 2.285 million subscribers with a life time value of $2,422 per subscriber. This equates to a total of $5.53 billion for current subscribers. Additionally, the company’s subscriber base is growing quickly with an increase of 467,000 during the 2020 financial year. Xero is working hard to increase the revenue earned from customers. In the 2020 financial year, it saw a 27% increase in the lifetime value of subscribers.

The company earns a gross margin of 85.2% from customers. This means that a massive 85.2% of the company’s revenue forms its gross profit. In the 2020 financial year, Xero then invested a significant amount in marketing, product development and paid administration expenses. It earned a net profit after tax of $3.3 million. This was the first time the company posted a full year net profit and reflects the growth of the company.

These numbers are just the beginning, with Xero boasting in its annual report that it has the opportunity to reach the entire global small business community.

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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