Which small-cap tech stocks should you buy?

The information technology (IT) sector offers Australian investors a wealth of opportunities to buy into emerging growth companies.

The sector is split into three industry groups namely: Software & Services, Technology Hardware & Equipment and Semiconductors & Semiconductor Equipment.

There are certainly some interesting businesses within the second industry grouping of Hardware & Equipment, while the third industry grouping only counts three stocks as members! In this article, we will be focussing on the first industry group – Software & Services.

Like the mining services sector, a number of IT service companies have been hard hit from lacklustre customer spending over the past few years. While industry-wide spending levels may take a while to bounce back, now could be the time to selectively pick up some attractively priced stocks.

Here are two businesses that recently presented at the Annual Australian Microcap Investment Conference that could be worth considering…

Melbourne IT Limited (ASX: MLB)

With a focus on enabling businesses to be successful online, Melbourne IT goes to the heart of the online economy. The company describes itself as “the designers, the engineers and the operators of the most effective online solutions.”

Having undertaken asset sales and acquisitions over the past two years, Melbourne IT is now the largest internet domain name registrar in Australia and in fact the world’s sixth largest. The share price is close to a year low – although this hides the fact that a large special dividend and capital return have been paid – giving the company a market capitalisation of about $130 million.

With a growing Managed Services business which provides shareholders with exposure to the trend towards cloud computing and synergistic cost saving flowing through from its acquisition of Netregistry, Melbourne IT is forecast to achieve big earnings growth for the full year to December 2014.

Empired Ltd (ASX: EPD)

Empired is an IT service provider with a focus on delivering enterprise IT solutions to clients that improve efficiency, productivity and competitive advantage for their businesses. These services are typically offered to medium to large corporate and government clients across a range of sectors including energy, resources, insurance, finance, utilities and transport.

With the group reporting record revenue and profits, up 44% and 144% respectively to $67 million and $3.8 million in FY 2014, the share price has responded with a gain of 21% in calendar year 2014. FY 2015 is shaping up to be another record year for Empired with around $100 million in contract wins to contribute.

On top of already won contracts, the group recently announced $17.4 million acquisition of Intergen Ltd. Intergen is a business focussed on providing Microsoft Solutions such as Microsoft Enterprise Resource Planning (ERP) services. It has revenues of $60 million which will effectively double the size of Empired’s revenue base with management forecasting FY 2016 revenue in the range of $145 million to $165 million.

With reasonable valuations considering the growth profiles of these two companies, both Melbourne IT and Empired could currently meet the investment criteria for some investors.

An even better alternative to Melbourne IT and Empired

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

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