By Gabriel Yi, Managing Director of M3 Investment Group
Technology advances have created some of the most valuable companies in the world and the tech sector reflects one of the true growth sectors in the stock market. Think Apple, Alphabet, Amazon – most reside in the technology hubs of Silicon Valley, and continue to innovate and introduce new products and services to drive their growth. However most of these tech behemoths are listed overseas which begs the question, are there opportunities here in the Australian market? Although the tech sector tends to be comprised of capital-light businesses with strong growth prospects, it still represents a very small proportion of the ASX 300 and for the longer term investor, may reflect strong opportunities. There are some interesting developments to watch in 2017.
Appen Limited (APX.AX) is a global technology company specializing in speech and search technology services. Its impressive client list includes multinational tech companies, governments, automakers, and social media leaders. 2016 proved to be a fantastic follow up year after its IPO listing in January 2015. Appen’s stellar year was highlighted by a key contract renewal from one of its major customers, Microsoft, across a range of Appen products and services to improve interaction between humans and computers. The linguistic data leader was also able to obtain a significant contract renewal with its largest social media customer (speculated to be Facebook) and contract win with the ‘largest global photo sharing platform’ (speculated to be Instagram). Speech interaction technology can be found in many facets of mainstream devices ranging from smartphones to cars, which creates a market for language data specialists like Appen to help improve performance and decrease error rates with a technology that is being used more and more in society. With a fundamentally strong balance sheet of zero debt, 29% return on equity, Appen looks attractive. Key contract renewals as well as new contract wins are imperative to continue its strong momentum in 2017.
Coming off a strong earnings report in 2016 where they affirmed their revenue target of $200 million by 2020, Altium (ALU.AX) has proven to be a leading electronic Printed Circuit Board software provider, and its market share has continued to grow. The applications of Altium’s products are diverse, ranging from automobiles and aerospace to mobile devices and computers. Its customer base has continued to grow due to its attractive product offering and include the likes of NASA, Microsoft, Bose, BMW, and AUDI. Altium also have diversified earnings with 48% from the Americas, 32% from Europe, 14% from Emerging Markets and 7% from Asia Pacific. A strong balance sheet of zero debt, growing EBIT and revenue further improves Altium’s investment case.
Fresh off a $100 million equity raising to fund the acquisition of XOS Technologies and PLAYERTEK, Catapult (CAT.AX) had a very eventful 2016. It is a company that provides wearable athlete tracking technology, which allows sport teams, coaches and players to monitor and optimize athlete performance. Catapult boasts a marquee roster of clients across a range of sports including NFL, NBA, EPL, AFL, NRL to name a few. XOS Technologies specializes in digital and video analytics while PLAYERTEK provides wearable analytics software solutions for the prosumer market. 2017 will be an interesting year for Catapult. One of the key factors to their success would be how effectively they capitalize on synergies and cross-sell opportunities with their newly acquired businesses. A potential catalyst for future growth would be the level of market share they are able to obtain in the large North American college sports market.
Although not quite at the level of the NASDAQ, the ASX still offers opportunity in the tech sector. It is important to look at how large the addressable market is for each opportunity and conduct qualitative analysis on management and how the industry is trending. With a push in recent times towards reviving the Australian tech sector and nurturing home-grown talent in the space, we can be hopeful for more unicorns (private tech companies with valuation of $1 billion or more) to find a place on our ASX in the near future.
This content has been prepared without taking into consideration any individual’s particular objectives, financial situation and needs. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.