Technology's powerful promise in 2016

Prophecy International Holdings Limited (ASX:PRO) shares could head higher.

| More on:
a woman

You鈥檙e reading a free article with opinions that may differ from The Motley Fool鈥檚 Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Prime Minister Malcolm Turnbull announced his Innovation Statement last month聽under an 'ideas boom' mantra that aims to create a more entrepreneurial Australia able to support growth and investment in new technology businesses聽built for the digital future聽into 2016 and beyond.

The two essential ingredients in creating fast-growing digital businesses are skilled workers and investor capital, with many of the policy initiatives aimed at promoting education and encouraging investment via tax incentives. A total of $51 million will be invested to help school children learn software coding and other digital technologies, while pathways to permanent residency for science, technology and engineering graduates from聽overseas will be made easier.

The tax incentives are largely aimed at start-up investors with capital gains exemptions for early stage investors and a 20 per cent tax offset for investments capped at up to $200,000 per year, per investor. This may sound attractive to private investors dreaming of snaring their share of the next聽Uber, but backing start-ups is not for the faint-hearted, with the majority failing and the risk-reward profile poor compared to other asset classes.

Opportunities abound聽

Australia though has plenty of start-up successes and the ideas boom means more support for the junior tech sector via a bigger pool of human talent with the education and specialist skills required to help start-ups聽succeed on the global stage.

For investors, such businesses worth knowing about can be commonly found in the financial technology, biotech or medical technology spaces. Indeed, many of the ideas boom policies directly promote investment and research in these sectors via the creation of a $250 million Biomedical Translation Fund and $200 million CSIRO Innovation Fund.

Although given the overall emphasis on digital excellence and development, another sector looks the standout winner from the government's largesse.

Enter, Software as a service (SaaS). This is a technology trend every investor should be familiar with given the transformational effect software will have on almost every aspect of business and industry over the next decade and beyond.

The聽SaaS聽sector involves start-ups designing and selling software products that can be delivered to customers online in order to help them save time and money via the beneficial effects the software brings to an unlimited number of business processes across private or public industry. In fact the ASX itself already has multiple junior tech companies profiting from this phenomenon:

Sitting in the sweet spot聽 Ltd (ASX: UBN) sells software to building or facilities management companies that helps them improve operating processes as they manage properties. It's growing internationally with underlying earnings of $3.5 million in the last financial year and a strong outlook based on a huge addressable market. The current market valuation is $145 million and after recent price falls shares now trade not far above a level they were offered at聽during聽the IPO stage in August 2014.

Touchcorp Ltd 聽(ASX: TCH) creates software that helps convenience stores sell top up vouchers, gift cards and phone credit to consumers on the move. The software helps electronically facilitate the transactions with the convenience store as the middleman and the company's market value is around $240 million. Total revenues climbed 69% in the most recent half year to $18.4 million and the business retains an exciting outlook.

Prophecy International Holdings Limited (ASX: PRO) is in cyber-security which is an area being directly supported by $30 million of new industry funding under the ideas boom. The global cyber security market is now estimated to be worth $70 billion and Prophecy's software sales have been going through the roof. It has a blue-chip list of global clients keen to bolster their online security, with a market value of $125聽million聽and fast-rising share price.

Foolish takeaway聽

Anyone who doubts the potential of聽SaaS聽start-ups need only look at the blockbuster IPO of聽Atlassian, the Sydney-based聽SaaS聽start-up founded by two University of NSW graduates in 2002.

Motley Fool contributor Tom Richardson has no position in any stocks mentioned. 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 Prophecy International Holdings Ltd. and TOUCHCORP 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.

More on 鈴革笍 Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
鈴革笍 Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
鈴革笍 Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more

asx investor daydreaming about US shares
鈴革笍 How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more

鈴革笍 Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more