Investors have seen huge returns from the established Australian listed website operators. Since 2009, Carsales.com Limited (ASX: CRZ), SEEK Limited (ASX: SEK), and REA Group Limited (ASX: REA) have returned 172%, 202% and 522% respectively. This equates to an average annual return of between 22% and 44%, even before dividends are taken into account.
Looking expensive
The majority of recent investment coverage about these companies has considered whether they deserve their lofty price to earnings ratios of 18 (SEK), 29 (CRZ) and 48 (REA), seeing as they already dominate their Australian markets and may find growth more difficult to come by in the future.
Small Alternatives
While the transition of car, job and house advertisements to the Internet is well established, there are many other sectors that are being disrupted by internet-based companies. Disruptive companies can be risky, but can deliver huge returns if they capture significant market share.
There are three standout smaller companies that are disrupting existing industries and have plenty of room to grow.
Accounting software is a fairly bland topic, however the rise of the Internet 'cloud' has made this dour topic infinitely more interesting. XERO FPO NZ (ASX: XRO) has built accounting software that runs in the cloud and can be easily scaled to different size businesses. User feedback indicates that Xero's software is close to the best available and is putting increasing pressure on dominant rival Reckon Limited (ASX: RKN) to develop a suitable alternative. Xero's market share is still small, but with exposure in the US and Australia, it has plenty of room to grow.
Freelancer Ltd (ASX: FLN) listed in 2013 and is one of the dominant players in the worldwide micro-job listing market. The company's website connects skilled individuals from all over the world with small jobs and takes a cut of all transactions. Freelancer is growing quickly and is making smart acquisitions to further develop its global presence. I imagine it won't be too long before the company starts delivering big profits.
Finally, OzForex Group Limited (ASX: OFX) is disrupting the foreign exchange market so long dominated by the large global banks. OzForex offers currency trading and transfers at much lower transaction fees and spreads than existing companies. It currently has an estimated 5% market share in Australia, which will grow in the years to come assuming cheaper competitors don't enter its market.
Foolish takeaway
Small companies disrupting existing industries can deliver huge returns for investors that jump in early. Xero, Freelancer and OzForex are quickly growing their customer bases and ruffling the feathers of existing industry players. All three have also pulled back from their all-time highs and represent good long-term purchases for investors willing to accept some volatility.
