The world is becoming more advanced every year and it’s making it harder for traditional blue chips to grow. The blue chips of tomorrow are most likely to come from the Software as a Service (SaaS) sector.
Those potential blue chips of the future will already be displaying good characteristics such as growing recurring revenue, a strong market position and growing profitability. Ideally these companies will also have high retention rates which means they will always be building their client base.
I think the following businesses are three of the best SaaS companies on the ASX:
Link Administration Holdings Ltd (ASX: LNK)
Link is the leading superannuation software company in Australia with a market capitalisation of $2.7 billion. This makes it one of the biggest software companies on the ASX. It provides a number of corporate and data services.
Around 90% of its revenue is reoccurring thanks to the service that it provides to some of Australia’s largest super funds like HESTA, Hostplus, Cbus and MTAA Super.
With superannuation being one industry that looks likely to grow over the coming years, Link is servicing the right market.
Link is trading at 61x FY16’s earnings with a partially franked dividend yield of 1.03%.
Computershare Limited (ASX: CPU)
Computershare is the $6.8 billion software company that provides corporate trust, stock transfer and employee share plan services in a number of different continents.
A large majority of its revenue is earned overseas, with 47% of revenue from the USA, 9% from Canada and 6% from Asia. Owning Computershare shares is a good way to get some international diversification.
Computershare has maintained or grown its dividend every year since 2002 making it one of the most reliable dividend payers on the ASX over the last 15 years.
Computershare is trading at 17x FY17’s estimated earnings with a partially franked dividend yield of 2.61%.
Class Ltd (ASX: CL1)
Class is a $346 million software provider of cloud accounting for self-managed super funds (SMSFs).
It’s a rising star in the software industry as it takes more of the market and at the end of December 2016 it accounted for 21.7% of SMSFs.
The efficiency of Class’ system make it a big hit with accountants, which is why their retention rate has been over 99% for a few years now (excluding AMP Limited (ASX: AMP) taking their business in-house).
I think Class has an exciting few years ahead and could be one of the best growth stocks on the ASX.
Class is trading at 42x FY17’s estimated earnings with a dividend yield of 1.37%.
All three of these businesses should be good investments and I can see all three turning into much larger businesses over the coming years. Of the three I’d pick Class for its fast-growing market share and potential. If the above three don’t get your investing juices flowing, you should read about our number one dividend pick for 2017 instead.
Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of Class Limited. 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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