2 tech shares ready to have a blockbuster 2016

Tech stocks often trade on potential, but here’s why the profitable groundwork has already been laid for XERO FPO NZ (ASX:XRO) and Freelancer Ltd (ASX:FLN).

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There is something about technology shares that makes otherwise rational investors buy into blue sky stories that they would avoid if they were attached to a speculative mining company.

But the two shares on this list are different. They each went through the almost customary hype cycle that precedes the listing of a new tech stock. They also saw strong debuts when they hit the ASX boards for the first time, growing spectacularly with all at least doubling from the original issue price.

Read on to find out why each is also poised to turn promise into profits in 2016.

XERO FPO NZ (ASX: XRO) is one of the better known tech stories on the ASX. The provider of accounting software to small businesses and medium-sized enterprises has a lot of things going for it. Among them is the fact that it is a relatively “sticky” business model where users are unlikely to switch to another provider if they are happy with the service.

In addition, the revenue model is brilliant, with users billed monthly which provides the company with regular, stable, recurring revenue streams. The interesting thing about Xero is that is can “flick the switch” to profitability at any time it chooses by limiting investment.

The reason it does not do so is that it is chasing a dominant position in the huge North American market. Xero has pedigree in doing just that, having reached number 1 status in New Zealand and Australia for cloud accounting for business.

Leading into 2016, Xero’s gross margins are expanding, and the company has close to 600,000 paying subscribers. That’s right, paying. That’s what sets Xero up for a bright 2016.

Freelancer Ltd (ASX: FLN) is an online portal that matches those seeking work with those needing jobs completed. These jobs are as diverse as the user base, with employment ranging from computer programming to creative writing and financial consulting.

Like other online “list companies” Freelancer looks to benefit from having the largest community of both users and employers for online work. To this end, the company has built a user base of close to 17 million, with over 8.5 million jobs completed to date, with a total value of over $3.9 billion.

The company has the share price to support acquisitions, and will likely continue being a consolidator of smaller online job matching portals in order to build its community. This is crucial as Freelancer generates revenues by taking a fixed percentage cut of the value of every job on its platform.

Freelancer has generated positive operating cash flow for the first time and has narrowed its net loss as it approaches the ecosystem size that will allow it to operate profitably on a consistent basis.

It’s arguable that Freelancer could be a bigger company in 10 years time, but Xero looks to have taken a lot more of the steps required to become a profitable tech company in the near term.

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*Returns as of January 12th 2022

Motley Fool contributor Ry Padarath owns shares of Xero. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Xero. 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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