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Date : 19/08/2022

Xero or Altium; Which ASX Tech Stock is the Best Deal

Tech stocks are always investors’ favourites as they have the potential to be a big thing in the future. Investors are interested in every aspect of the company, and after intense scrutiny, if a tech stock makes sense, investors won’t let it go. Most of the time, economic uncertainties compel investors to invest in a tech stock to gain a solid gain on the investment in future.

Tech stocks have been the go-to for global investors in the past decade. There is the FAANG in the USA and WAAX here on the ASX. The huge total addressable markets, promising stellar future cashflows, and high operating margins have tended to sway investors towards tech stocks. Tech stocks had also performed admirably in the past decade until earlier this year, when the rally stopped.

Current State Of ASX Tech Stock Index

In 2022, ASX tech stocks have taken a beating and globally as inflation and interest rate worries spread.

This decline in value has been severe, and more may come. However, this pullback may present a chance for long-term investors to buy high-quality stocks at a discount.

The S&P/ASX 200 Information Technology Index (ASX: XIJ) represents the market’s most prominent tech stock, up 0.28%. Meanwhile, losses of 0.8% were recorded across the board in the broader S&P/ASX All Technology Index (ASX: XTX).

The S&P/ASX 200 Index (ASX: XJO) and the All Ordinaries Index (ASX: XAO) are up 0.5%.

Among the best ASX tech stocks, Xero Limited (ASX: XRO) and Altium Limited (ASX: ALU) are two of the worst performers this year, each down by more than 30%. The decline in these high-quality tech stocks is temporary, and the stock will recover. For investors, knowing which ASX tech stock is the best deal among these two is essential.

Is Xero Still a Hero?

The days of physically installing accounting software on your computer from CDs and small company owners transferring their files on a USB drive before sending them to their accountant are long gone.

Xero Limited (ASX: XRO) is a cloud-first accounting software platform with a USP that can be used from anywhere at any time on any device.

Xero Limited (ASX: XRO) initially focused on expanding inside Australia and New Zealand before expanding internationally. Cloud adoption still has a long runway, but it currently has a strong presence in the UK and North America.

For obvious reasons, Xero’s software is hard to ditch since it is essential to the daily running of many small businesses. Therefore, once a business owner begins using the integrations within the software, the overall ease of the entire process increases his switching cost to another platform.

These factors contribute to Xero’s excellent client retention rates and give the company significant price leverage. Over time, Xero Limited (ASX: XRO) has improved its average revenue per user (ARPU), in addition to developing additional features and add-ons.

Lifetime value (LTV) and customer acquisition cost (CAC) reveal the elegance of Xero’s economics (LTV). After all, the foundation of every successful enterprise is the principle that the lifetime value of a client exceeds the cost of acquiring that customer.

An LTV/CAC ratio of 6.9 was recorded by Xero Limited (ASX: XRO) in FY22. As a result, Xero calculates that it earns $6.90 for every dollar it invests in acquiring a paying client. Investors are eager to point out Xero’s enormous marketing budget, but we believe it is prudent to put money into these channels because of their high returns.

ASX: XRO Xero Limited Stock trend on


What about Altium? Does it Make sense?

Altium Limited (ASX: ALU) is a software provider for creating printed circuit boards (PCBs), which are essential to the functionality of electrical gadgets.

Altium Limited (ASX: ALU) is a market leader, has extended its portfolio of different products, and has high-value customers.

Printed circuit boards (PCBs) form the backbone of numerous modern electronics. Altium Limited (ASX: ALU) is impacted by the expansion of several sectors, such as transportation, aircraft, consumer electronics, and biotechnology.

With the proliferation of “internet of things”–style linked gadgets, Altium has also emerged as a significant participant in this space.

Altium Ltd (ASX: ALU) meets all the criteria for a premium growth stock. It requires little in the way of initial investment, is highly scalable, has high switching costs that keep customers coming back, and has a healthy cash flow and no debt.

The company has set an ambitious goal of 100,000 Altium Designer subscribers and US$500 million in revenue by FY26. Altium, for example, has claimed 56,000 customers in the most recent half and US$191 million in sales for FY21.

The company is looking forward to succeeding in its new cloud platform, Altium 365. It could be a game-changer for the company as it allows the users to create electronic designs on the cloud and build a community around it. Altium Ltd (ASX: ALU) is a pioneer in this technology and will always have the upper hand on the new companies emerging in this field.

ASX: ALU Altium Limited Stock trend on tradingview


Xero or Altium? Who is the Winner Here?

Both companies have a good financial foundation, stable income streams, experienced leadership, and low capital requirements.

As a result, it’s not shocking that Xero Limited (ASX: XRO) and Altium Limited (ASX: ALU) have been two of the most outstanding performers in the S&P/ASX 200 Index (ASX: XJO) during the last decade.

Xero and Altium, based on recent news, are a premium growth stock in the ASX charts. The question is: which is the best tech stock to buy?

Each tech stock make a strong case, but Xero’s attractive unit economics, ease of use, and growth potential make it a better tech stock than Altium. It doesn’t mean Altium is a stock insufficient, but Xero is one level ahead of this tech stock, at least. When Altium Limited (ASX: ALU) reports its FY22 earnings next week, investors should be more interested to see how the company has done in the post-pandemic era.

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