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Forget Telstra Corporation Ltd! This might be my #1 ASX tech share of 2017

Forget Telstra Corporation Ltd (ASX: TLS), at the current Freelancer Ltd (ASX: FLN) share price, I think it has a lot more to offer…but you will have to be patient.

Who is Freelancer?

Freelancer is the world’s largest freelance and crowdsourcing marketplace (by number of users), connecting millions of ’employers’ to ’employees’ who compete to do jobs stretching from $5 business card design to software projects for NASA. At the time I’m writing this article, Freelancer.com has 23.06 million employers and freelancers in over 247 countries.

The $426 million company is run by CEO and Chairman Matt Barrie, who also oversees the group’s online payment business, escrow.com. Formally, he was the CEO and co-founder of Sensory Networks, a pattern matching software company which was sold to Intel Corporation for $US20 million in 2013. Barrie sits on the board with two non-executive directors, Simon Clausen and Darren Williams. Barrie and Clausen hold around 42% and 34% of total shares outstanding, respectively.

That means their interests are pretty well aligned with shareholders (some would say, too well aligned).

How does it work?

Basically, Freelancer provides a marketplace for employers to securely post a ‘contest’ or ‘project’. By starting a contest, a job is open for all freelancers to submit a proposal. 

For example, earlier this week I wanted some software development done, so I posted a contest with a reward of a few hundred dollars. Many freelancers will submit their software and I’ll choose the best one. If I am happy with it, I could then choose to offer the freelancer more regular work.

In the case of a ‘project’, the employer chooses to hire a freelancer based on their portfolio of prior work. Freelancer clips the ticket and holds the money of the employer until the project or contest is signed off by both parties.

Freelancer Financials

Source: Freelancer HY Report

Source: Freelancer HY Report

For the financial year ended 31 December 2016, Freelancer reported increasing revenue with a wide gross margin of 86%. The number of registered users increased 26%, with the company also continuing to integrate its two South American freelance websites.

Total group revenue came in at $52 million, with a net loss of $1.5 million reported. However, free cash flow rose to around $2.1 million, from $483,000 a year earlier. The company had $34 million in cash with no debt.

Be patient

There are a few risks to the business model of Freelancer, including growing competition from rivals like Upwork, TopTal and Fiverr, as well as potential new entrants. As Aconex Ltd (ASX: ACX) and iSentia Group Ltd (ASX: ISD) have shown, even if you have a good piece of technology your investors can still get slammed.

I believe the industry could have room for multiple players. Importantly, I believe a couple of companies will take the lion’s share of this industry, with a few other sites able to make a living. So although Freelancer may not go on to be the biggest it currently appears to be in strong position. 

Foolish Takeaway

At today’s share prices, Freelancer trades around 5.7 times analysts’ revenue forecasts, which some might argue is not overly cheap. However, if — like me — you think that online jobs marketplaces are the new way for many employers to hire contractors, I think it is certainly worthy of further research throughout 2017. But make no mistake, Freelancer would be a long-term investment. 

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often full franked..

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If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of ACONEX FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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