One of the best performing areas of the market this year has been the information technology sector.
This sector has vastly outperformed the market average and I can’t say I’m surprised given the quality of the companies inside it.
Two of my favourites in the sector are listed below. Are they still in the buy zone?
Altium Limited (ASX: ALU)
With its shares up 170% since this time last year, it will come as no surprise to learn that Altium’s shares are now trading at a lofty 64x estimated full-year earnings. Whilst this is expensive and means that an investment in the printed circuit board (PCB) design software provider carries far higher than normal risk, I remain confident that the company will grow into its valuation and more in the coming years thanks to the Internet of Things boom. This is because PCBs are inside the majority of connected devices and as the number of these devices explodes, so too could demand for product licenses. I think this puts Altium in a strong position to hit its target of annual revenues of US$200 million by FY 2020. Overall, if your risk profile permits it, I would suggest you consider taking a closer look at Altium.
NEXTDC Ltd (ASX: NXT)
Another expensive tech share is NEXTDC. This data centre operator’s shares are trading at around 200x estimated full-year earnings at present. But as I have explained previously, this is a touch misleading as the company is investing heavily in its data centre network in order to snap up key strategic locations and grow its capacity so it can capture future demand. Once these investments are made, I believe NEXTDC will be able to generate significant free cash flows that goes some way to justifying today’s premium. However, it is worth remembering that if the company fails to live up to the market’s lofty expectations, it could see its shares crash lower. So if that’s too high risk for your liking then you might want to check out its rival Macquarie Telecom Group Ltd (ASX: MAQ) which trades on more reasonable multiples.
Alternatively, you could check out this next major tech boom before it is too late.
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Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. 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.