Technology shares often come with a predictable cycle of hype (sometimes bordering on hysteria). A novel or interesting business model, a huge addressable market and a good story spun by management often spurs huge share price rises, even when revenue is non-existent.
More often than not, this cycle ends in severe share price falls as speculators grow bored of the story or lock in profits.
But a select few tech stocks "come out the other side" as viable, revenue generating businesses. I believe that iCar Asia Ltd (ASX: ICQ) is one of these, and that there are some compelling reasons to invest.
A proven model
If you had to buy a car tomorrow, where would be the first place you would look? If you answered Carsales.com.au, then you would be one of a majority of Australians who answered the same way.
Carsales.com Ltd (ASX: CAR) is an amazing business that has replaced newspaper based classifieds advertising. It has done this by having a best-in-class user experience, partnering effectively with car dealers and continually adding features for private car buyers and sellers. The company consistently earns a return on equity of above 40%.
iCar is unashamedly replicating this model in Malaysia, Thailand and Indonesia. Adopting an already proven business model and applying it offshore goes a long way to reducing risk and the time taken to execute an idea.
Migration to web
According to the World Bank, Australia has an internet penetration rate of around 85%. In comparison, Malaysia sits at 68%, Thailand at 35% and Indonesia just 17%.
As the internet becomes more widespread in each of these countries, business models like iCar's become more accessible. In addition, each of these nations has a population in excess of Australia, meaning that the total addressable market is approximately 350 million people and growing.
Dominant positions
The most important metric for online classifieds advertising is a number one position in audience visits. If a company has a number one position, it can justify charging for its products, and eventually, raise its prices without customers leaving it.
iCar ticks this box, with audiences of 1.55 million, 1.89 million and 1.84 million in Malaysia, Thailand and Indonesia, respectively, which is far in excess of its competitors.
Collecting real cash
iCar has also successfully begun the most difficult step of the business cycle for tech companies: getting users to pay for the product. Malaysia is most advanced along this path, while Thailand is close behind. Indonesia only began monetisation activities late last year.
Users paying for products validates the business model and shows that the company is on the right track.
Long term runway
The opportunity for iCar is stellar. According to company research, the car ownership rate in Australia is around 703 cars per 1,000 people, while in iCar's target markets, it is only 212 per 1,000.
That shows that the potential for car ownership to grow is very strong, as these economies grow and the populace becomes wealthier.
A note of caution
It would be wrong to assume that there are not high risks of capital loss if you invest in iCar. Firstly, the company is not profitable as yet. That means that cash is a precious resource, although the company currently has around $16 million in the bank to fund operations.
In addition, a downturn in any of the three economies that iCar operates in will affect consumer spending, which would naturally affect car sales and iCar operations.
Foolish takeaway
iCar Asia is not without risk, but it is a long way advanced in turning its strategy into profits, and it has several compelling reasons to consider investing in it for the long term.
