Software is sexy from an investment perspective because for very little cost, you can get access to billions of people. Photo: josephine huynhSmall caps are all about leverage. When you are small, you get a bigger bang for your buck, and nowhere is this more the case than in technology.
Just look at the 163 per cent growth in first half net profit of Objective Corp, announced in late January. This company has a market cap of $56 million, yet it is winning contracts with big corporations and governments. It builds software that helps the Australian Government track documents, ensuring that emails go to the right person.
Software is sexy from an investment perspective because for very little cost, you can get access to billions of people. One of Radar’s favourites, eServGlobal, has more than tripled since we first tipped it in 2012, and much of this is based on the potential of its HomeSend technology, which allows the diaspora of the world to send money back to their homes via their mobile phones. This business isn’t even profitable yet!
eServ is one of a number of software developments centred around mobile payments companies. Many of these stocks are hot property as investors see the use of smart phones and tablets grow.
But there is also a great deal of risk in software developers of all types. The reality is that many will fail because of the big initial spend on research and development and the uncertainty over whether people will pay for it.
It is not just the small companies where there is risk. Xero has had massive success with its online offering of accounting software. It has a market cap close to $5 billion, but it is a number of years away from making a profit.
“Xero is in a customer grab at the moment and because capital markets open, it’s not worried about raising money to fund [these losses], but ultimately you have to generate capital internally to have a sustainable business,” says Nick Harris, the technology analyst at Morgans Stockbroking.
A safer bet could be the IT services sector, which is the sector’s biggest contributor to the ASX by market capitalisation (outside of telecommunications).
Their business model is to have an army of contractors who charge hourly rates and do project-related work. These companies make platforms like Microsoft and Salesforce talk to each other.
After fast growth in the late 1990s and early 2000s, the sector has stuttered as companies reduce their spending on IT. Traditionally IT spending increases at about 5 per cent a year, but in the past five years in the wake of the financial crisis, this has reduced to 2 per cent.
Harris believes that spending on the sector will increase from its historic lows and consequently advocates buying SMS Technology UXC and Oakton.
Whether or not you decide to invest in IT, there is no doubt the sector has a massive impact on your life.
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This story Administrator ready to work first appeared on Nanjing Night Net.