Should ASX shares be on your watchlist?

The ASX limited liability company (ASX:ASX) share price is up 0.6% since the start of 2024. Is it time to add ASX shares to your watchlist?

ASX share price in focus

ASX Limited operates Australia’s main national stock exchange. This includes the provision of securities exchange services, derivative exchange services, central counterparty clearing services and financial products related to registration, settlement and delivery-for-payment settlement.

The company provides access to a variety of products including stocks, futures, ETFs, managed funds and real estate investment trusts (REITs).

The ASX operates at the heart of Australia’s financial markets. It oversees the compliance of listed companies and aims to promote high standards of corporate governance and a fairer operating environment for retail investors.

ASX tech share case

The S&P/ASX200 News Index (ASX:XIJ) is back 14.60% annually for the last 5 years. This compares to an average across all ASX sectors of 4.22% over the same period. Here are some reasons why investors are so keen on ASX tech shares.

High margins

Technology companies tend to have much better margins than more “traditional” brick-and-mortar businesses. I mean, that’s usually the case more profitable.

For a simple reason: they typically have low marginal costs (such as distribution costs) and low overhead costs (such as machinery and equipment).

In its most recent annual report, the ASX reported a gross margin of 96.20% and an operating margin of 72.40%.

Recurring revenue

The second reason is that a feature of many tech companies is their recurring revenue. You’ve probably heard this term “software as a service” (SaaS) – this occurs when companies package their software as a service that customers pay monthly or yearly to access.

This is a great alternative to selling software as a product (one-time payment) because it allows you to smooth out revenues throughout the year and make profits more predictable over time.

Global scale

The third reason investors love tech companies is their global reach. If you run a brick-and-mortar business or sell physical products, your potential customer base may be limited by reach, regulations or logistics. For example, if you sell groceries, trying to sell into a foreign market means dealing with packaging regulations, biosecurity regulations, and tariffs or quotas.

On the other hand, the software can usually be downloaded by anyone with an Internet connection with one click. It is easy to “move” across borders, opening markets that may not have been available to product-based businesses. Basically, a A larger customer pool usually means more customers.

ASX share price valuation

As a growth company, one way to broadly estimate the ASX share price may be to compare its price-to-sales multiple over time. Currently, the ASX Ltd share price to sales ratio is 7.84x compared to the 5-year average of 8.12x, meaning the company’s shares are trading below their historical average. It’s important to remember that context is important – and this is just one valuation technique. Investment decisions cannot be based solely on one indicator.

Rask’s websites offer free online investing courses created by analysts explaining topics such as discounted cash flow (DCF) and dividend discount models (DDM). They even include free quote spreadsheets! Both of these models would be a better way to value the stock price.