Technology companies can make fantastic investments. They are less cyclical than retail and financial businesses as most charge customers ongoing fees and the products they provide are often non-discretionary. They are also less capital intensive than miners and are not susceptible to regulatory risks like many companies in the healthcare sector.
I’m also a big fan of small caps because they offer the potential for outsized returns. Here are three baby technology stocks that I bought recently.
Senetas Corporation Limited (ASX: SEN) makes hardware that encrypts data so that organisations can send valuable information across networks without fear of it being stolen. Historically, Senetas’ customers were mainly governments for whom data security has always been an imperative. However, regulatory changes and rising cyber-crime means that private companies are increasingly buying its products.
The cyber-security industry is highly competitive but Senetas has spent decades developing its technology and consequently it is hard to replicate. For example, Senetas encryptors are certified by more leading, independent government testing authorities than any other products of their type. Also, they don’t noticeably slow down the network unlike many other encryption solutions.
Senetas generates the bulk of its revenue from one-off hardware sales which means profits can be lumpy and the stock was sold off after the company reported a fall in earnings for the first half of 2016. However, in July Senetas announced that profit before tax (PBT) for the full year would be $6.8 million to $7.1 million versus $6 million last year. This result is even more impressive when you consider that R&D expenditure rose $1.6 million during the year to accelerate the launch of the company’s new high speed product.
Hub24 Ltd (ASX: HUB) provides award winning software to the financial planning industry. In the recent Investment Trends May 2016 Planner Technology Report, the HUB24 platform was ranked in second place overall and first place in the Value for Money category.
In October 2015, industry heavyweight IOOF Holdings Limited (ASX: IFL) made a takeover offer of around $150 million for HUB24 which was still unprofitable at the time. Although the bid was ultimately unsuccessful, it highlights the value of HUB24’s technology.
In the short time since then, the company has grown funds under administration (FUA) from $2.1 billion to $3.8 billion and reported that earnings before interest and tax (EBIT) were positive for the last quarter of 2016. Retail FUA surged 94.1% during the year to $3.3 billion and growth is accelerating with record net inflows of $579 million posted in the June quarter.
HUB24 charges recurring fees based on FUA but has a relatively fixed cost base. As more planners switch to HUB24’s best in class solution and superannuation contributions continue to rise, most of the incremental revenue will fall to HUB24’s bottom line. This bodes well for the next few years given the company looks to have finally reached profitability.
Nearmap Ltd (ASX: NEA) provides high resolution, frequently updated aerial images through its online platform under a subscription based model. It is a highly scalable business that enjoys significant competitive advantages thanks to its wide geographical coverage and vast database of images that can be used to track landscape changes over time.
Nearmap disappointed investors last year when it failed to achieve its target of at least $30 million of revenue in Australia by December 2015. However, recent management changes appear to have revitalised the company and Australian revenue was up by 32.2% to $7.8 million for the third quarter of 2016.
Perhaps more significantly, there are early signs that Nearmap’s recent expensive foray into the giant US market could work out. The region has now recorded three consecutive quarters of revenue growth since the company captured its first sale in 2015. The good news for investors is that despite this, the current share price does not appear to factor in any chance of Nearmap succeeding in the US.
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Motley Fool contributor Matt Brazier owns shares of Hub24 Ltd, Nearmap Ltd., and Senetas. Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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.