For new companies the tech sector can be both lucrative and risky. A great new idea can quickly bring in a fortune for a young startup. But because the rate of change in this industry is so rapid, a new company can just as easily swoop in with a disruptive technology that makes that old idea obsolete.
Add to that the well-publicised recent failings of fintech darlings GetSwift Ltd (ASX: GSW) and Big Un Ltd (ASX: BIG) and you have a sector of the market that many risk-averse investors might justifiably approach with some degree of scepticism.
But it’s a sector that cannot be ignored. The number of tech companies listed on the ASX increased by 118% from December 2014 to December 2017, with 80 new domestic and 39 new foreign companies listing over the 3 year period. Total market cap for the sector increased 140% to $63 billion over the same period.
So how do investors pick a genuine growth stock from this sector when there is so much hype around companies like GetSwift and Big Un?
Sometimes it pays to invest in companies with the experience and resources to both defend their IP against the threats posed by new entrants to the industry and have the pedigree to deliver consistent growth for their shareholders.
Altium develops printed circuit boards (PCBs), an integral component to almost all electronic devices. The company is an industry leader in product design and its clients include global giants Dell, Microsoft, NASA and SIEMENS.
Altium forecasts that more than 30 billion smart devices will be connected to one another through the “Internet of Things” by 2020. It expects this trend will spur demand for ever-more complex PCBs. With over 30 years of investment in R&D under its belt, Altium is confident it can cash in on this new trend in tech.
Altium delivered strong first half FY18 results. Revenues were up 30% on the prior comparative period to US $63.3 million, and profit was up 50.8% to US $14.9 million. Altium grew its subscription pool by 4% during the reporting period, and had 35,966 active subscribers as at 31 December 2017.
Nextdc provides data warehousing and connectivity solutions for its clients. It operates a number of data centres as well as a Cloud Centre marketplace which connects businesses with suppliers and customers.
Nextdc doesn’t have as long an operating history as Altium, having only been established in 2010. However during this time it has grown into Australia’s leading data centre operator.
It too delivered exceptional first half FY18 results. Revenues increased by 32% on the prior comparative period to $77.5 million. After tax profit for 1H17 benefited from the recognition of a one-off $11.3 million tax benefit associated with accumulated tax losses, but profit before tax in 1H18 jumped 54% higher to $12.4 million.
The result was strong enough for Nextdc to upgrade its full year revenue guidance to between $152 million and $158 million, while it expected underlying EBITDA in the range of $58 million to $62 million.
Recent company failures shouldn’t deter investors from seeking out quality growth stocks in the technology sector. Although it does show that extra care and due diligence should be taken when selecting stocks.
A well-diversified portfolio should include companies operating in this sector, and Altium and Nextdc are both well-established industry leaders that still offer long-term growth potential. These companies still carry many of the same risks as others in this industry, but at least they have a proven track record of success.
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Motley Fool contributor Rhys Brock owns shares of Altium. The Motley Fool Australia owns shares of Altium. 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 Scott Phillips.