Software is eating the world – which companies should you own?

“Software is eating the world”.

That’s a quote from Marc Andreessen, a famous American venture capital investor, in a Wall Street Journal article from 2011. He went on to say:

“We are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.“

I think there is plenty of evidence that this shift is well underway, and every portfolio should have some exposure to high-quality software companies.

Based on current data from the ASX, there are 136 stocks in the Software & Services category, out of 2,181 listed companies.

Around 40 of these are large enough to be included in the All Ordinaries, and their average share price return over the last 12 months was 22% – ranging from Adacel Technologies Limited (ASX: ADA) up 373%, to 1-Page Ltd (ASX: 1PG) down 76%.

Taking a long-term view, cloud accounting software company Xero FPO NZX (ASX: XRO) is hard to beat in terms of its product, high growth rate, and huge global market potential.

Aconex Ltd (ASX: ACX) is also well worth keeping track of. It sells software for project management in the construction industry and has over 500,000 users in 70 countries. It was recently named in the Tech Pioneers Report as one of the top 50 innovative companies in Australia and New Zealand.

The share price has been a great performer, up over 130% in the last year. Currently trading around $7, brokers see more upside potential – Morgan Stanley has a $10 price target.

Also on the Tech Pioneers list, WiseTech Global Ltd (ASX: WTC) has developed a cloud software solution for international supply chain management and currently has around 6,000 customers, including most of the world’s largest logistics companies.

WiseTech has a market capitalisation of around $1.3 billion. Earnings are expected to explode in the next few years, and WiseTech has the potential to grow into a much larger company.

Class Limited (ASX: CL1) provides a software platform for the administration and management of investment portfolios, primarily self-managed super funds. Class has plenty of competition but has been growing its market share for the last five years, and now has around 17% (100,000) of all SMSFs on its platform.

Class has solid revenue growth, is profitable, and pays a small dividend. Shares have risen strongly – they listed in December at $1 and now trade around $3.20.

Also worth a look are Altium Limited (ASX: ALU), Touchcorp Ltd (ASX: TCH) and Hansen Technologies Limited (ASX: HSN).

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Motley Fool contributor Matthew Bugden has shares in Xero and WiseTech Global. The Motley Fool Australia owns shares of Altium, Class Limited, Hansen Technologies, TOUCHCORP FPO, WiseTech Global, and 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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