Miss Xero’s 669.5% return? We’re searching for the next software star

It’s not worth dwelling on a missed opportunity; there are plenty more out there just waiting to be discovered.

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NZ-based accounting software provider Xero FPO NZ (ASX: XRO) has, in a short space of time, been an amazing success story as the firm has taken market share from more established rivals such as MYOB and Reckon Limited (ASX: RKN). Despite the company not yet earning a profit, investors are well and truly attuned to the company’s potential with the share price (of the Australian listed units) rocketing 669.5% since November 2012 and ascribing a value of around $4.1 billion to the firm.

While Xero’s share price could still go much higher if the business ultimately reaches its full potential, it certainly isn’t an undiscovered minnow any more. Rather than dwelling on what is perhaps a missed opportunity, investors can turn their attention to searching for the next blockbuster software star. Here are a few possible contenders:

1)      eServGlobal Limited (ASX: ESV) is focussed on partnering with money exchange and telecommunications companies to provide its software services to help customers seamlessly transfer funds around the globe – think a Western Union office but on your mobile. With literally billions of people in developing nations unable to access banking facilities, eServGlobal’s products can provide an incredibly important service to many.

 

2)      GBST Holdings Limited (ASX: GBT) shareholders have already enjoyed a 154% rally in their share price in the past year but that could just be the beginning if the securities transaction and fund administration software provider can continue to expand its customer base outside of Australia. GBST is certainly having some success with international sales of its capital market products doubling in the first half of the current financial year.

 

3)      Technology One Limited (ASX: TNE) isn’t exactly ‘undiscovered’ given it already boasts a market capitalisation of $760 million, earned a profit before tax in FY 2013 of $35 million and describes itself as Australia’s largest publicly listed software company.  However with a suite of products which provide integrated enterprise solutions to over 1,000 companies and government departments primarily in Australia, the potential for expansion overseas via its already established presences in NZ, South Pacific, Asia and the UK could provide significant future growth.

Foolish takeaway

The beauty of software firms is that once a product is developed there is generally a very low incremental cost associated with additional sales. This means that super-high profit margins can be leveraged from each additional customer which can lead to super-profits for shareholders.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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