At a recent tech conference, I heard from trends analysts and CEO’s of emerging ASX-listed companies on the cusp of developing trends.
Innovation and disruption are of course constants in time, but as one pacing technologist spoke of how cloud computing and big data will be increasingly harnessed to advance things like Internet of Things, Artificial Intelligence, and Crowd-Sourcing, I couldn’t help but feel slightly anxious about the accelerating pace of technological change, and the uncertainty it brings to investment markets.
A handy overview developing trends produced by Citrix can be downloaded from their website.
Listed tech stocks can be particularly risky, therefore the key is to confidently identify businesses that can capture and retain demand and whose competitive position gets stronger through time, and avoid the unproven ones. Leading tech industry intelligence firm Gartner refers to the ‘Hype Cycle’ that follows the introduction of a potentially disruptive technology, which is something to keep in mind.
Figure 1. Gartner’s Hype Cycle
So without further adieu, three businesses I thought were particularly interesting are:
- Electronics circuit board design software company Altium;
- Cloud-based enterprise content & comms platform provider Objective Corp; and
- Fixed broadband device and software company NetComm Wireless.
The major event for Altium this year is its partnership with Dassault Systems, to fully integrate Altium into the Dassault’s world-leading mechanical design software product Solidworks.
Solidworks is essential software for industrial designers and mechanical engineers and it is a central component of engineering courses at universities. Just a 1% conversion rate over Solidworks’s 2 million users (Altium currently has 30,000 subscribers), would translate to around a third of ALU’s current earnings. Altium has not included any benefit in its guidance.
Electronics CAD software was initially highly fragmented across the various tool chains involved in building, visualising and simulating electronic circuitry. The need for less friction and more functionality drove demand for unified tool chains and cloud-based applications, resulting in a concentrated industry of four players now.
Figure. Altium Product Offering
Full integration with Solidworks sets Altium well apart and positions the business for the Internet of Things, which will see an explosion of web-connected devices over the next decade – and accelerating demand for systems design software with unified mechanical and electronic design tools.
The flagship Altium Designer product initially targeted the low-end market but the company has closed the capability gap through R&D and acquisitons to become the dominant mainstream player.
Computer-aided design (CAD) software has a high learning curve and switching costs are high, however Altium has impressively grown revenues at over double industry averages over the last five years. It is now quickly closing the capability gap on high-end competitors, which lack an MCAD software partner like Solidworks and cost users twice as much.
Figure 4. Altium Market Segment
Management’s target of market leadership by 2020, which implies ALU’s revenue share increases from 10% to at least 30%. Shares at $6.20 are close to fair value, however there is still long term upside.
Another business with exciting prospects and leveraged to the Internet of Things thematic is enterprise software provider Objective Corp.
Objective provides a cloud-based content management and communications platform to public sector and government-regulated industries. To provide better services and reduce costs modern governments demand secure records management and seemless communications between agencies. Objective enables this via its three core products ECM (enterprise content management), Connect (information sharing and process management), and Keystone ECC (collaborative authoring).
To give an example of Objective’s capabilities, imagine an emergency situation where ambulance uses an ECG on a patient to test for cardiac abnormalities. Data can be sent from the scene to the hospital allowing medical staff to be prepared before the patient arrives.
The deep integration with government operations means switching costs are very high and churn rates are less than 1%.
The addition of Objective’s SaaS products on the Microsoft Azure cloud platform this year is a step change for the company and provides global reach.
Similar to Altium, more than 50% of Objective’s revenues are recurring in nature, and proportion of recurring revenues is growing rapidly as clients increasingly shift to the cloud. Operating leverage should lead to margin expansion as revenues increase. We think the $1.66 share price is undemanding.
And finally, Netcomm Wireless is another tech company with exciting prospects in the $80 billion fixed wireless market and $66bn M2M market, which is expected to reach $11 trillion annually by 2025. M2M is short for machine to machine communications via wireless technologies.
Figure. NTC wireless products
Source. Netcomm Wireless
Netcomm has a 35 year history but as CFO Ken Sheridan said in his presentation, it has only recently found out what it’s good at. In years past the company was known mainly for its broadband business selling consumer grade routers and power line devices in Australia. Going forward the company will be known around the world for its wireless M2M and Fixed Wireless products. Following the internationally recognised success in delivering the Fixed Wireless component of the NBN rollout, Netcomm is a highly sought-after technology partner for global carriers as they migrate from 2G to 3G and 4G networks. Last year Netcomm signed a master purchase agreement with top tier US carrier AT&T to deploy fixed wireless in rural areas of the US where it is too expensive to upgrade fixed line networks.
Figure 5. Netcomm’s Fix Wireless Performance
Source. Ovum Fixed Wireless Broadband Comparison
Netcomm’s early success is significant because the choice of technology partner carries career risk for decision makers of carriers around the world. The company is also pursuing “pain points” in M2M as enterprises across industries migrate to 3G and 4G devices.
The company has adopted a “coat-tails” strategy which means it’s reliant on partner companies winning contracts and developing infrastructure. Future earnings will largely depend on whether Netcomm can win more contracts, but there is certainly potential for the business to be much larger than it is today. Consensus revenues and earnings are rising respectively from $74m to $280m and $3.5m to $30m pver the next three years. For context Netcomm’s market cap is $400m.
So those are three technology stocks we find interesting and we will be doing more research and valuation work on them. If you have any insights on the tech sector that you would like to share, we would love to hear them.
Written by Jonathan Wilson, Analyst. Original article first published in StocksInValue.