This Rask Media article forms part of our series on ASX technology and software companies, which we’ve aired during August 2020.
Why you want tech stocks in your portfolio
Judging the way the world is coping with COVID-19, restrictions and our economic challenges, it’s clear that the software and technology sector is where a meaningful part of every investor’s portfolio should be allocated.
While many people may think ‘growth shares are only for young people’ or ‘technology is too risky for a conservative portfolio’, I’d say it’s riskier to avoid these opportunities. For example, a conservative investor in his or her retirement might still have 10% of their portfolio in growth-style investments. If you plan to live another 5, 10 or 20 years, you would be doing yourself a disservice by avoiding arguably the most promising sector.
Just take the performance of different companies since the beginning of this year, especially as the market emerged from the ‘COVID crash’. Having some exposure to ASX growth shares or the technology sector would have proven to be so important for your returns.
If you’re looking more ideas, check out these articles I wrote recently:
- The ASX’s 10 largest tech stocks
- 10 software stocks under $1 billion
- 10 more software stocks under $500 million
Without further ado, here are seven technology shares that are between $1 billion and $2 billion.
7 ASX technology companies to watch
Megaport Ltd (ASX: MP1)
Founded by Australian technology veteran Bevan Slattery, Megaport provides companies with connectivity to the cloud and platforms like Amazon.Com’s (NASDAQ: AMZN) AWS and Microsoft’s (NASDAQ: MSFT) Azure. It operates globally with data centers in Australia/Asia, North America and Europe.
Megaport has grown its top line very quickly since 2017, with revenue rising from $11 million and expected to hit $58 million this year. As we know, the cloud isn’t going away.
Iress Ltd (ASX: IRE)
Iress is arguably Australia’s leading financial services software company, connecting financial advisers to key data and automation tools across financial planning, market data, funds management, Super, mortgages and insurance. Basically, it’s a very sticky business.
Given its incumbency and the loyalty of its customers, Iress has a proven ability to grow revenue and profits steadily year over year, and it also pays dividends. With wide gross profit margins and a sticky customer base, Iress seems like a stock to buy-up when the market throws it aside for short-term reasons.
Tyro Payments Ltd (ASX: TYR)
A relatively recent addition to the ASX boards, Tyro Payments has wasted no time in catching the attention of investors. Chances are, you may have used a Tyro product or service without even noticing. Tyro is a finance and technology business engaged in the provision of merchant credit, debit and EFTPOS services. When you visit your local cafe have a look at the EFTPOS terminal or your copy of the receipt.
Tyro makes money based on the transactions going through its network and new merchants coming on board. During COVID, I used Tyro’s regular ASX updates and weekly reporting of transactions through its network to get a pulse check on the economy and small businesses.
At $1.6 billion in market capitalisation, Tyro trades at a high multiple of revenue (8x) and is yet to become free cash flow positive.
FINEOS Corporation Holdings PLC (ASX: FCL)
Based in Ireland, with offices around the world, FINEOS is a software company for enterprises in the insurance and social security sectors. It claims to have 7 of the 10 largest life and health carriers in the US. For example, FINEOS software allows insurers to handle and process insurance claims and manage rehabilitation, and to make payments and combine billing.
FINEOS recently made the acquisition of the California-based insurance workflows business Limelight Health Inc for $US75 million ($104 million), which it says has complemented the existing product suite, provides for growth and cross-selling opportunities.
EML Payments Ltd (ASX: EML)
EML Payments is a financial technology company that specialises in issuing and managing prepaid stored-value products, such as reloadable cards or single-store gift cards. The company was founded in 2001 with its head office is in Brisbane, Australia.
EML’s operations are split across Gift & Incentive (G&I), General Purpose Reloadable (GPR) and Virtual Account Numbers (VANS). Basically, the company helps its corporate customers manage money and incentives across their employee and/or customer base.
Crucial to the company’s rebound in recent months, COVID prompted EML to negotiate a harder — and save $189 million — on its takeover of Ireland’s Prepaid Financial Services (PFS). The renewed deal shored up EML’s balance sheet at an uncertain time while allowing the business to continue to look forward to synergies and expand its market presence.
Nearmap Ltd (ASX: NEA)
Nearmap is a geospatial imaging business which effectively takes high-resolution photos and similar style imagery which can then be used by corporate customers to plan, implement and monitor projects or assets. For example, a mining company could plan and design its tenements before digging then monitor projects in construction.
Fun fact: one of my biggest regrets is selling Nearmap shares — then my largest position — at around 56 cents — they’re now $2.44.
Thanks to an expansion into the US, Nearmap has been able to fortify its position, acquire new sticky customers and grow its revenue. The latest update from the company in June 2020 revealed annualised contracted value (ACV) of $102 million, based on a US 70 cents exchange rate. The company said churn, or the number of customers leaving each year, was below 10%. Nearmap is due to report its results on August 19th.
Bravura Solutions Ltd (ASX: BVS)
Similar to Iress, Bravura is a wealth management software business established in 2004. Bravura offers software solutions and services to superannuation and pension funds, life insurers, investment companies, wrap platforms, private wealth advisers and funds administrators.
Despite the Royal Commission into financial advice and Super, including the exodus of thousands of bank-aligned financial advisers, Bravura has continued to grow its customer base and ratchet up revenue.
In fact, the company has grown its revenue at a compound annual rate of 14% over five years. On average, a customer will stay with Bravura for between five and six years, providing a significant window of opportunity for the company to embed itself into their financial adviser or fund managers’ workflows.
Buy, Hold or Sell?
Given that I run the Rask Invest service, the membership service where I share all of my latest research and share ideas with members, I won’t label any of these a buy, hold or sell.
However, at the very least I think these companies should be on your watchlist because most of these companies could prove that their sticky business models have the wherewithal to fend off uncertainty and continue to grow quickly over time.
If I was to pick three companies to research first, they would be Bravura, Iress and Megaport. But that’s probably because they are within my circle of competence, being technology and finance.
If you want the names of a technology company I’ve already bought, grab a copy of our free investment report below.