A lot of retail investors love tech shares because the best ones can rise like rockets for a long time and faster than any other sector on the ASX.
The only trouble is that finding the good ones from a large field of also rans is a tough challenge. In fact for every listed tech share that goes onto be a big success most will never get off the ground.
So to narrow down the list of eligible candidates you have to stick to the fundamentals and look to businesses growing sales strongly in large addressable markets.
They must also have a strong product offering or market-leading technology that provides pricing power and some sort of moat. Scalability is also often behind the big winners. This is where a business can scale with little extra investment because for example it uses the internet and digital connectivity to service clients on a cost effective basis.
They'll also be preferably founder led and have a track record of a consistently rising share price as evidence that they're the real deal, rather than a flash in the pan.
Below are four businesses that potentially tick the boxes for lots more growth ahead.
Xero Limited (ASX: XRO) is the cloud accounting platform that probably now has more than 2 million subscribers globally. Its market-leading product should also give it the ability to lift prices down the line without losing customers. Moreover, it still has room to double subscriber numbers again and its software-as-a-service recurring revenue model offers potential for high compound profit growth.
Nearmap Ltd (ASX: NEA) is an aerial mapping business that also offers a software-as-a-service recurring revenue model while boasting strong growth potential in the giant US market. It also appears to have a market-leading product as it invests heavily in new tech including AI, data analytics, and oblique or 3D imagery. All of this should improve its competitive position and pricing power down the line. The balance sheet is strong and the share price has got a lot cheaper since August 2019.
Afterpay Touch Group Ltd (ASX: APT) is the buy-now-pay-later fintech start-up that is delivering eye-watering growth rates as it provides consumers an interest free alternative to credit cards. It also helps retailers sell 'bigger baskets' of goods as consumers shop more at stores that offer the Afterpay product. So its 'win-win' model is wildly popular with consumers and retailers. Over August 2019 it reportedly signed up 12,000 new customers a day in the US, UK and ANZ. It faces growing competition, but the current growth is hard to beat.
EML Payments Ltd (ASX: EML) is a prepaid payments solutions provider that posted EBITDA (operating income) of $29.1 million on revenue of $97.2 million on gross transaction value of $9.03 billion for fiscal 2019. It's growing strongly with EBITDA and revenue up 40% and 37% respectively in fiscal 2019. It's also already profitable with a net cash position around $18 million. In addition the attractive economics and large addressable markets should tick the boxes for tech investors.
