Investing in Tech Stocks? Here are 5 key metrics you need to know!

Here are 5 key metrics you need to know if you’re investing in tech stocks!

1. Annual Recurring Revenue (ARR)

ARR is a key metric used by subscription-based businesses to measure the predictable and recurring revenue they can expect over the course of a year. It represents the total revenue generated from all active subscriptions on an annual basis, excluding one-time fees, variable charges, or non-recurring income. It is a relevant not only relevant to tech companies but others too, although tech companies use it the most because they often rely on recurring revenue models (in other words, subscription models with regular payments).

Let’s illustrate. Suppose a tech company has 1 million customers, and each customer is contracted $1,000 annually for a subscription. The total ARR would be $1bn. Now of course, this may not correlate with revenue because some customers may have only come onboard part-way through the financial year and others may have left – it is at a particular point in time.

One example of an ASX tech stock’s ARR: TechnologyOne (ASX:TNE) reported (470.2m in FY24 and is aiming for at least $1bn by 2030.

Even so, it shows the potential for long-term revenue growth. ARR demonstrates how well a company is retaining customers and generating consistent revenue, which is a sign of business maturity and sustainability. So investors will typically like businesses with a high ARR.

A further note, Since ARR is calculated from recurring subscriptions, it also indirectly highlights the impact of churn (the rate at which customers cancel subscriptions – more on that later) and expansion (such as upselling or cross-selling to existing customers). A stable or growing ARR indicates lower churn or effective upsell strategies.

2. Lifetime Value (LTV)

LTV stands for Lifetime Value. It is a metric used in business to estimate the total revenue a customer will generate for a company over the entire duration of their relationship. In other words, LTV is a prediction of the net profit a business can expect from a customer over time. Calculating LTV is crucial for understanding how much a company should spend to acquire new customers and how to prioritise retaining existing ones. Here’s a general formula for calculating LTV:

LTV = Average Revenue per User (ARPU) × Customer Lifetime

Where Average Revenue per User (ARPU) is the average revenue generated from a customer over a certain period (e.g., monthly or annually) and Customer Lifetime is the average duration (in months or years) that a customer stays with the business.

Not many tech stocks report this, but Xero last reported its as NZ$14.8bn in November 2023 – we assume this is the Customer Lifetime for all customers combined. Divide that figure by its 3.7m subscribers and you get $3,957.21 per customer.

3. Average Revenue Per User (ARPU)

ARPU measures the revenue generated on average from each user (or customer) over a specific period, usually on a monthly or annual basis. ARPU helps tech companies and their investors understand the financial value of each active user or customer, and it is often used to gauge growth, profitability, and customer engagement.

Obviously it helps track how much revenue is being generated per subscriber (or user) over a month or a year. By extension, it helps determine how well the company is monetising its free users and converting them to paying customers.

Example: Xero had ARPU of $39.29 in FY24, meaning each subscriber contributes $39.29 to the company’s coffers on average.

4. Customer Acquisition Cost (CAC)

CAC (sometimes known as User Acquisition Cost) measures the total cost of acquiring a new customer. It includes all the expenses associated with marketing, sales, advertising, and other efforts needed to attract and convert a potential customer into an actual paying user or client.

For tech companies—especially those that rely on digital platforms, subscriptions, or freemium models—understanding CAC is crucial for balancing customer acquisition efforts with long-term profitability. CAC is often used in conjunction with other metrics like ARPU and LTV.

It helps tech companies understand how much it costs to bring in a new customer. When compared with LTV (Lifetime Value), it reveals whether a company is spending too much to acquire customers relative to how much those customers will eventually generate in revenue. Are they customers the business would be better off without?

Tech companies can also use it for its own internal purposes, to determine which marketing channels or campaigns are the most cost-effective and can allocate their marketing budgets accordingly to improve customer acquisition efficiency.

5. Churn

Also known as customer churn or attrition, churn refers to the percentage of customers who stop using a service or cancel their subscription during a specific period. For tech companies—especially those with subscription-based or recurring revenue models like SaaS (Software as a Service), streaming services, and mobile apps—churn is a critical metric. It directly impacts growth, revenue, and long-term business sustainability.

Churn is a signal of customer dissatisfaction, product-market fit issues, or competitive pressures, and it has a significant impact on revenue generation. Since tech companies often depend on recurring revenue, retaining customers is vital for long-term profitability. A high churn rate can stifle growth and increase the cost of customer acquisition (CAC), making it harder to scale the business.

As a general rule of thumb, any churn of under 2% is very good, anything over 5% would be concerning.

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