Shares in Gentrack Group Ltd (ASX: GTK), XERO FPO NZX (ASX: XRO) and Class Ltd (ASX: CL1) play into three key technology trends.
Technology, shaping our world — faster than ever
Earlier this week, I was lucky enough to share a meal with a respected Australian technology investor. He's big into tech. Specifically, Australian tech.
Here are the insights I took away from our talk, including three trends that I believe long-term investors can exploit right here in Australia.
1. Enterprise Software
Enterprise software is software that, well, is for the enterprise. For many large companies, an end-to-end integrated platform significantly reduces the labour costs and improves the all-round efficiency of the organisation.
Enterprise software is really nothing new but I think investors have a tendency to underestimate its longer-term potential. Just imagine how difficult it would be for your business or company to rip out its key IT system to make room for new software or transition to a new provider.
Technology One Limited (ASX: TNE) specialises in the development, sale and supply of enterprise software. Unfortunately, if you want a slice of this $1.8 billion business, it will cost you. Its shares currently trade around 44 times its profit.
2. Software as a Service
SaaS, or Software as a Service, is the idea of putting a technology solution in 'the cloud' and allowing users to access it via a subscription. There are many reasons why SaaS businesses have grown in popularity from a user's perspective. For example, it can be accessed from almost any device. And for businesses, there's no need for expensive servers because the software is accessed via an internet connection.
From the provider's perspective, they control the costs. And the business is intensely scalable. Meaning, the cost of adding an extra user is often minimal, so the revenue from additional users falls straight to the bottom line (profit).
Some of my favourite SaaS businesses on the ASX are Gentrack, Xero and Class.
3. Recurring revenue
This isn't a technology in itself but relates to each of the points above. No longer do you need to buy an edition of Microsoft's Office for a laptop or PC. Many of the best applications can be accessed with a subscription, producing recurring revenue for the company. And the more people that use the software the more ingrained its products become.
Take Xero, the cloud accounting software developer, as an example. Once accountants have migrated clients to Xero and used it for a couple of years they will be very reluctant to switch to another provider. Ultimately, these accountants may become dependent on Xero's software to be competitive and make a decent return for their services.
Foolish Takeaway
I think it's important to mindful not to catch yourself buying into a 'story'. As a share market investor, it's the businesses that you are buying, so it's important to understand why it will be successful above all others.
Nonetheless, these three trends and the companies noted above are worthy of a closer inspection, in my opinion.
