Which are the fastest growing ASX software stocks? (Part II)

This is the second of two articles identifying the ASX’s fastest growing software companies. Part I revealed Wisetech Global (ASX: WTC) and Aconex Ltd (ASX: ACX) as two of five companies that grew organic revenue by more than 30% over the last year. These are the final three companies in reverse order of growth rate:

Vista Group International Ltd (ASX: VGL) provides software to the film industry, primarily to cinema operators. The company recorded 42% revenue growth in the first half of 2016 excluding acquisitions. 66% of revenue is recurring and based on the first half of the year, Vista is on track to exceed NZ$80 million of revenue in 2016.

The company is in the process of finalising what could be a highly lucrative joint venture with Weying Technology Co Limited, which is backed by Asian technology giant Tencent Holdings.

Last year, Vista generated NZ$2.9 million in free cash flows before acquisitions and has NZ$8.5 million in cash alongside a market capitalisation of $511.8 million.

Class Ltd (ASX: CL1) sells self-managed super software and delivered organic revenue growth of 45% to $22.7 million in 2016. It is easily the smallest company on this list and usually it is easier for small companies to grow quicker than large ones.

Class generates its revenue from ongoing license fees and has strong customer retention rates just like Wisetech.

Unlike many of the other companies on this list, Class produced a similar level of free cash flow to reported profit in 2016. 2016 NPAT was $5.2 million and the company finished the year with $15.2 million in cash and no debt. It currently has a market capitalisation of $461.4 million.

Cloud accounting software company XERO FPO NZX (ASX: XRO) is the largest company on the list as well as the fastest growing. It recorded a 67% uplift in revenue in 2016 to NZ$207.1 million.

This list is full of companies that many would consider to be overpriced but Xero is perhaps the most controversial of all. It has been purposefully run at a loss in order to maximise sales growth and in 2016 reported free cash outflows of NZ$88.6 million.

Despite this it has a market capitalisation of $2.7 billion and had NZ$184 million in cash at the end of March 2016.

Foolish takeaway

All of the above five businesses have bright futures in my opinion but the trouble is that they’re currently priced accordingly. I wouldn’t be surprised to see any or all of these stocks drop in price in the next couple of years if sentiment turns. On the other hand, as long as the underlying companies keep kicking goals, any falls would most likely be temporary.

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Motley Fool contributor Matt Brazier owns shares of Xero. You can follow Matt on Twitter @MatthewBrazier1

The Motley Fool Australia owns shares of Class Limited 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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