There is no doubt that technology companies are some of the fastest growing on the S&P. However, they also tend to be the most expensive on a PE basis. There is also concern about how the policies of President Trump will impact on the sector. However, one would ask if it was possible to select companies that may not be the most glamorous yet have the most prospects for growth. In this article we will delve into some tech companies that have been overlooked but have the most scope for growth in 2017 (as well as returns on your portfolio).
Check Point Software Technologies
This cyber security firm that was founded in Israel in the 1990s tends to be quite shareholder friendly and is trading on a relatively low P/E ratio of 25. This company also operates in one of the most relevant Technology sub sectors, namely information security. Given the amount of cyber threats that presented themselves last year, firms that offer clients protection from hackers are in more demand currently. Checkpoint more specifically focuses on network and data security using a number of tools including firewalls etc. Their first quarter results no doubt caught investors off guard as the stock rallied by over 7% on the announcement. This is mainly because of the 21% increase in EPS. This was caused by effective cost cutting initiatives which translated into better bottom line figures. Another positive announcement by the CEO was the drive to increase subscriptions and hence incurring and stable revenues.
When it comes to an essential part of a company’s operations, Enterprise Resource Planning (ERP) is essential to that. One of the most established names in ERP software is SAP. ERP is fundamental to companies as it manages HR, payroll, Supply chains etc. Given that so many companies use SAP, it is no surprise that they will continue to use it for the foreseeable future. SAP software benefits from the “lock-in” effect. Essentially, once a company has integrated the software into their systems, they are extremely reluctant to change. This mainly comes down to the costs of changing from retraining staff to replacing other compatible software. However, SAP is not just relying on its powerful existing customer base but is also trying to expand into new technologies such as Cloud Computing. They recently completed purchases of companies including Concur and Ariba which operate in this industry. One can be certain of heavy cash flow generation from the core operations which were up nearly 12% in Q3 of 2016 on the previous year. This will no doubt provide a lot of firepower for the company to invest in other areas such as R&D and acquisitions.
Tech Financials is another company out of Israel that recently listed on the London Stock Exchange. They provide technology and platform solutions to option managed account providers and brokers. They are already used by a number of top brokers in the industry. Although the share price has had quite a tough time, this appears to have been arrested and it had quite a rally last year. The company is now fully profitable and at an attractive discount. If one were to compare this to a competitor such as Plus500, the price seems like a bargain at a 5x EV/EBITDA ratio. Although there was a slowdown in trading revenue in Europe due to increased regulation, a new partnership with Cantor Fitzgerald will mean that the company has more growth opportunities in the U.S.
For a small business person or self employed individuals, taxes and accounting can be some of the most time consuming and involved processes. This is where Intuit enters the picture. They have two companies which are at the forefront of these markets, namely QuickBooks and TurboTax. What is most interesting about these companies is the size of the operating margins that they are able to generate. QuickBooks had revenue of $2.3bn in the previous financial year with operating income of $874m. However, the TurboTax franchise was able to generate operating income of $1.3bn on $2bn of Revenue. There is also more growth on the horizon for both of these companies because of two very important developments. The first is a deal with American Express to integrate the QuickBooks system into that of AMEX’s. This means that it will be easier for users of QuickBooks to get loans directly online. Another important development for TurboTax is the growth of self-employed individuals in the U.S. This is mainly as a result of the new providers in the “sharing economy”. These include drivers for companies such as Lyft and Uber and landlords who provide accommodation through AirBnB.
Shopiify is an Ecommerce platform coming out of Canada that is already quite well known among online entrepreneurs. What it essentially provides is the opportunity for individuals to set up online stores that are hosted by Shopify. These users can then customize their online store with a number of different plugins and themes. The Shopify platform is also well optimised for use on mobile devices such as phones and tablets. They charge a subscription income for the hosting and payment processing and they currently have over 350k subscribers on the platform. What is even more of a vote of confidence in Shopify was the announcement by Amazon that they would be partnering with Shopify by rolling out Amazon payments on the platform. Moreover, Shopify seems like it still has a lot of growth ahead of it given the number of entrepreneurs who are yet to expand and run their own online stores (46 Million by Shopify’s estimates). Although the company is currently making losses on the bottom line the top line growth is the key number to watch. As a relatively new tech company, capturing the market with customer growth is essential to securing dominance in the future.
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