I regularly get to experience the pleasure of presenting at investor events. I love to debunk limitations that investors perceive they have and turn them into opportunities for those who can think laterally. I’m regularly asked whether investing in tech stocks is a US-only game.
In the most recent case, an investor lamented that the US had a much larger number of tech stocks listed on its exchanges. And investors have benefited enormously. The tech-heavy NASDAQ is trading at a record high, 30 per cent above peak reached before the tech wreck in 2000. The performance of companies such as Amazon, Facebook, Google and Apple are reported on more than most ASX-listed businesses.
By contrast, Australia’s information technology sector, according to the Global Industry Classification Standard, is the smallest of 11 sector groupings by market capitalisation.
Overall our risk appetite for high-risk, small start-ups is somewhat muted. This has led many Australian tech businesses to move overseas in search of more sympathetic capital. The biggest success story so far is Atlassian, which now has a market capitalisation of $US10.7 billion ($13.9 billion). This would put it at number 33 in terms of market cap on our exchange and place it safely in the S&P/ASX50.
However, don’t be fooled into thinking that just because a sector is small, there are no opportunities for investing in tech stocks. We have been a big supporter of the sector, holding a disproportionately large exposure among our Star Growth Stock portfolios, including long-term success story Carsales.com. While it is true that in the past many tech stocks were speculative plays, the reality is that today many are profitable, generating strong cash flows and delivering strong returns for investors.
Our analysis shows that there are four fantastic tech stories that are Financially Healthy, generate strong earnings, with favourable prospects and punch well above their weight in terms of global reach and market value. We have experienced strong returns from these names and their price-earnings ratios sit at elevated levels. Those investing in tech stocks should consider this if taking a new position today.
While the global big tech names will likely retain the focus of the media, we urge investors to look a little deeper and consider IT stocks built in our own backyard.
1. Appen Limited (APX)
Appen is a language technology data and service provider that now earns 95 per cent of its revenue from the US. Appen works with 130-plus companies and has a workforce of more than 300 people in six countries. The company is one of our star stocks and has grown earnings incredibly well since listing in 2015 – though its history started 20 years ago. Ties to its past are strong with ex-chief executive and co-founder Chris Vonwiller still chairman of the board. He has a significant shareholding with his wife, Julie Vonwiller, a fellow co-founder.
2. Gentrack Limited (GTK)
Gentrack is one of our smaller star stocks, although no less a success story. Gentrack is a developer of specialist software for energy utilities, water companies and airports around the world. It recently upgraded earnings guidance by some 20 per cent and has more than 200 companies and 20 airports utilising its technology across New Zealand, Australia, Britain and Europe. The board has deep IT experience, including chairman John Clifford who has held the role for 10 years.
3. Integrated Research Limited (IRI)
Integrated Research is another Australian IT success story operating in more than 75 countries servicing some big global businesses. This star stock has been in business since 1988 and its founder and chairman Steve Killelea still holds a significant amount of stock, despite a recent small sell-down. Providing performance monitoring and diagnostics software for business-critical computing environments, the company continues to exhibit strong growth qualities.
4. WiseTech Global Limited (WTC)
WiseTech Global services the logistics industry globally by providing software that monitors the movement of goods. With a presence in 125 countries, the company has been on an aggressive buying spree recently, adding depth to its client base as it looks to expand and increase market share. Founder Richard White, who started the business in 1994, remains chief executive, leaving us to believe that the company is in the hands of a knowledgeable and passionate leader.