Investing in Technology
Technology is pervasive in our everyday lives. Certainly, the technology sector seems to reflect this as it is consistently one of the most dynamic and fastest-growing sectors of the Australian stock market. We have a number of world-leading technology companies that have delivered fantastic returns to shareholders in recent years. In this article, we identify three ASX-listed technology stocks to consider adding to your portfolio.
Overseas, particularly in the USA, technology companies are among some of the largest drivers in the local economy. In fact, at the time of writing, the largest companies in the USA by market capitalisation were: Apple, Microsoft and Alphabet (Google).
|RANK||Company||Market Cap (As of 7/10/21)|
|1.||Apple (AAPL)||$2.35 T|
|2.||Microsoft Corporation (MSFT)||$2.20T|
As tech companies tend to invest heavily in research and development, they are known for their innovation and inventiveness. The growing competition in this area can also lead to a steady stream of new and improved technologies. While there can be growth opportunities in the tech sector, it is important investors have a good understanding of modern technology and the tech products available before investing.
So when it comes to the tech sector in Australia, here are a few companies that have performed well recently and could be worth exploring.
Atomos (AMS) +55.15% YTD
Chances are, either before you read this article or soon after, you’ll watch a video on investing or on prospective stock picks. We have a new name for a person who creates video content on investing, ‘finfluencer‘, which is an amalgam of the words ‘financial’ and ‘influencer’. Indeed, there appears to be an influencer for just about anything you’re interested in, as countless individuals try to strike it rich by giving advice on the internet!
Ok, so what’s all of this got to do with Atomos? Well, Atomos has a range of very neat video monitor and recording products that allow content creators to quickly and efficiently create and review their content on the go and in real-time. Of course, their prospective market is far greater than simply influencers and social media superstars, with Atomos’ products also being increasingly adopted by the broader videography industry.
And the adoption of Atomos’ revolutionary video products has been substantial since the company began selling them early last decade. As a pioneer in simultaneous video monitoring and recording, Atomos now dominates the space, and many of its solutions are top sellers in their respective categories.
Importantly, this strong sales performance has also translated into earnings growth. Whilst the pandemic took a chunk out the company’s growth in FY20, the performance before and following is has been impressive with average underlying earnings growth before interest, tax and depreciation (EBITDA) of over 100% per annum.
Computershare (CPU) +42.01% YTD
Computershare is one of Australia’s first technology companies, founded in Melbourne in 1978 and listing on the ASX in 1994. Originally a share registry business, it has grown to encompass a number of other listing and shareholder related services, but more recently, it has expanded into trust and agency services via the acquisition of Wells Fargo’s US Corporate Trust business in March this year.
The business was on track for its fifth straight year of solid earnings growth prior to the COVID19 pandemic which negatively impacted the number of new listings on major stock exchanges. The other major drawback of the pandemic on Computershare’s business recorded low-interest rates which were used as a tool by central banks to jump-start the global economy.
Computershare acts as a conduit between the companies it provides issuer services to and the shareholders of those companies. When one of Computershare’s clients pays a dividend, for a small period, this cash passes through Computershare’s accounts before being distributed to the client’s shareholders. In that window, Computershare earns interest on the cash, which it classifies as margin income (MI). Because of the plunge in interest rates in the wake of the pandemic, FY20 saw Computershare record its worst MI yield in the company’s long history.
MI has indeed been the main driver of the decline in Computershare’s earnings through FY20-21 and has obscured the underlying story of continued growth in its Issuer Services business which includes Register Maintenance and Corporate Actions. Along with Employee Share Plans, the other flagship operating business, each unit benefited from the higher transaction activity that accompanied stronger equity markets through the second half of 2020 and so far in 2021.
To illustrate the swing in recent momentum, we note that Computershare’s second-half FY21 earnings were 39% higher than its first-half earnings. Computershare offers its customers a comprehensive suite of solutions. Each unit is a high-quality business that is geared for growth as economies and stock markets continue to recover.
Pureprofile (PPL) +215% YTD
Pureprofile is a data insight and online research company that provides a detailed analysis of online consumer behaviour and trends to digital advertising agencies, corporate marketing departments, and content creators. Apart from selling the various consumer data it collects, Pureprofile also collates this data into a self-service platform which enables its customers to efficiently analyse and utilise it on demand. The company also offers services for planning, executing and managing digital advertising campaigns.
Pureprofile has over 700 clients across 91 countries. Some of its blue-chip clients include UberEats, Afterpay, Coles, Woolworths, Telstra, Qantas, and a number of major Australian banks. Pureprofile is distinct from its competitors due to the scale of its data-gathering capability, which leverages numerous consumer survey networks to gather millions of data points on consumer trends and behaviour. In the rapidly evolving digital marketing landscape, data is powerful, and potentially very profitable. This is why the demand for consumer data is rapidly increasing across big and small enterprises. Testament to the company’s unique and functional product offering is the 91% client retention rate Pureprofile currently enjoys.
On the financial side, we like the fact that the company is experiencing rapid growth in both revenues and earnings, with a jump of 24% and 124% respectively in FY21. All business units experienced growth, but particularly impressive was the self-service platform, sold under a software as a service (SaaS) model, which jumped 119%. SaaS models are typically subscription-based and focussed on recurring revenue. As the cost of adding a new user is typically very small, margins on SaaS business tend to be very high.
Pureprofile’s operating cash flow of $2.4m in FY21 is an impressive 71% higher than in FY20. This strong result positions the company well with respect to continuing to invest in its growth, and also for potentially commencing dividend payments down the track. Pureprofile’s valuation does not appear to be challenging, with the company currently trading at just over 7 times expected FY22 earnings.
Thinking of investing?
These are just three of a number of high-quality ASX-listed technology shares. Assessing the business behind the shares you are buying with a long term outlook is imperative. As always, you should do your own research to ensure investment in any of these companies suits your own individual needs. Remember that past performance is not an indicator of future performance.
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