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Why I think this ASX 100 technology company is a great buy

While the WAAAX tech shares are in the spotlight right now, another major Australian technology/digital media company that deserves just as much attention in my opinion is SEEK Limited (ASX: SEK).

Seek.com.au is by far the largest online classifieds employment site in Australia. Its size enables it to attract even more job seekers and employers, which further entrenches its dominant position, creating a competitive barrier to entry.

Its overseas assets include SEEK Asia and its stake in a massive Chinese employment site named Zhaopin.

Although market conditions remain challenging, Seek remains on path to meet its revenue and profitability growth in FY20. Last November, its management advised that it expects revenue growth of between 15% and 18% and earnings before interest, tax, depreciation and amortisation growth of 8% to 11%.

SEEK has also followed REA Group Limited (ASX: REA)  in recently in launching ‘depth’ job advertisements in Australia and New Zealand, that provide Seek with higher revenues per advertisement, and there is still an opportunity to roll out these depth products globally.

Investing for future growth impacting dividend payouts

During the last few years Seek has been making significant investments in new businesses and ventures to support future global growth opportunities. This plan is expected to continue over the next few years.

Seek’s management has set a very high aspirational revenue of $5 billion by FY25 – that’s more than t3 times the $1,537 million revenue it posted in FY19.

As a result, Seek recently signalled its intention to lower its dividend payout ratio to 30–50% of net profit, down from 50–60%. The extra cash available will be reinvested back into the business to support this growth strategy. This could place Seek’s dividends under pressure during the short term, however, if net profit continues to grow at its projected rate, I believe it shouldn’t impact the dividend payout over the medium- to long-term.

Competitive threats and headwinds

Seek’s main competitive threat is not from other local websites, but from the global business network giant LinkedIn. However, this threat first appeared over 5 to 10 years ago, and so far, LinkedIn doesn’t appear to have had any significant impact on Seek’s profitability.

There has also been some recent market concern that Seek’s China-based division is being negatively impacted by the US–China trade war. However, long term the online job listings market looks set to continue to grow strongly in China’s massive market.

Exciting new areas for growth

Seek is one of the Australian market leaders in artificial intelligence (AI) investment, and has built a team of more than 100 specialist data scientists and software engineers to leverage AI by learning about how candidates search for job ads to more effectively target ad placements. Already the new technology has started to see lifts in ad click-through rates, according to Seek.

Foolish takeaway

I believe Seek is well-positioned to continue to deliver strong revenue and profitability growth over the next decade, thanks to its market-leading and entrenched market position in its local Australian market and its growing international presence.

Although significant investment into new ventures has impacted its profitability growth in the short term, I believe that these investments should set it up for strong growth over the next 5 to 10 years.

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Motley Fool contributor Phil Harpur owns shares in SEEK Limited. The Motley Fool Australia has recommended REA Group Limited and SEEK 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 Scott Phillips.

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