In 1997 a Harvard Business School professor introduced a concept that quickly reached buzzword status – disruptive technology. The term has taken on many meanings over the years, but at its core a disruptive technology is one that changes the way businesses operate.
While some view “disruption” as potentially destroying certain businesses, anything introduced by a company that forces others to alter the way they do business is disruptive. Disruption typically impacts an industry by introducing something new, or some modification to the existing way of doing things that result in more efficiency and better benefit to the customer.
The classic example is the iPhone, which was an extension of existing Smart Phones into a new arena – entertainment. The iPhone did not destroy the Smart Phone providers of the day but has forced them to change.
Disruptive companies can pop up in any sector, but if you search the Internet for lists of these companies you will find many are in the technology sector. The following table includes five ASX technology stocks that are already disrupting the businesses in which they operate or have the potential to do so. All are recent listings and all came to the ASX through “reverse” mergers or backdoor listings. This involves acquiring what remains of a defunct company that still has an ASX listing. Here is the table.
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Freelancer Ltd (FLN) was the first to go public and serves as an excellent example of the perils and pitfalls of investing in young companies, no matter how disruptive the technology they profess to offer.
Freelancer provides a website platform that serves as a marketplace for skilled professionals looking for temporary or project work and businesses of all sizes looking for temporary or project help. Freelancer is not the only such website, but the company does claim to be the largest in the world. Freelancer has expanded the business model characteristic of smaller platforms to include large scale outsourcing and crowd sourcing. In addition, the company offers recruiting services for companies that are willing to pay to have Freelancer sort through its data base of freelancers. Finally, Freelance also offers skill development opportunities through its Freelancer Community.
Despite the ready availability of investing advice that warns retail investors to “do their homework”, many invest on hype, betting on promise. The company meets one of the cardinal rules for lower risk investing in “start-up” companies, which is existing revenue generation. Ideally speaking, investors should stick to companies going public with a track record of revenue generation as a private entity. At a minimum, the company should be very close to commercialising whatever it is that it offers.
The public debut of FLN was preceded by substantial hype and you can see from the table what happened. The issue price – which few retail investors can take advantage of – was a mere $0.50 but the stock jumped to $2.50 at the open before falling back to $1.60 at the close.
The price performance of Freelancer over the last two years shows what can happen to companies like this when investors eager for revenue turning into profitability are disappointed. Here is the chart.
The early financials disappointed and FLN fell from market darling status. In the absence of solid financial results many investors evaluate a stock like Freelancer and the other start-ups in the table based on share price gains. The approach appears to be if it’s “hot”, buy it. As FLN regained its heat, investors returned, vaulting the stock back into the ranks of the darlings.
Financial websites are filled with percentage increases that get the blood pumping for many investors. You know the hype – this stock is up ten thousand percent! There are two things you need to know about how these increases are calculated.
First, they typically use the issue price, not the price at the opening or closing of the first day of trading. Gains based on the issue price generally go to institutional investors and high net worth individuals able to buy at the issue price. A better measure for retail investors is to use the closing price.
Second, start-ups with less than one year trading history as a new entity often include the share price performance of the defunct company up to the time of the listing.
For example, if you check historical prices for the second stock in our table, 1 Page Ltd (1PG) you will see they go back to 2006. So the year over year gain listed for 1PG – around +240% – is lower than the gains based on the actual date 1PG began trading.
In Freelancer’s case you will read the stock is up close to 200% year over year. True; but that ignores the 2014 collapse. However, Freelancer appears to be on the right track as it is the only stock in the table with a positive two year earnings growth forecast – 87%. Analysts estimate the company will turn profitable in FY 2016.
Freelancer, 1 Page, and the last stock in the table – Reffind Ltd (RFN) – all stand to benefit from a long-term trend in technology, and a surprising one at that. Everyone knows about the major trends – mobile connectivity, cloud computing, data security and analytics, and financial technology or “Fintech”. Analysts and experts tell us advanced tech applications are penetrating the world of Human Resources at an accelerating pace.
Freelancer and its competitors have changed the way companies look for workers and workers look for companies. 1 Page could change the way company’s interview and hire prospective full-time employees.
1 Page Ltd (1PG) is the first company based in the fabled Silicon Valley in the US to list here on the ASX. This came as a surprise to Silicon Valley Venture Capital firms accustomed to funding start-ups with growth capital. 1 Page uses its cloud-based software platforms to assist companies and high profile job candidates to find each other.
The company’s approach replaces the traditional means of searching for candidates and then evaluating hundreds of resumes. A software platform enables employees of its customer companies to refer candidates. Then another platform presents the prospective candidate with a sample problem typical of the job to be filled and asks the candidate to reply with a one page proposal.
1 Page already has an impressive list of customers including Sears, Red Bull, Accenture, BuzzFeed, and Starbucks. Recent quarterly results showed a 20% increase in revenue, following a successful institutional capital raise. The company is on an aggressive growth strategy requiring substantial capital expenditures; meaning profitability may take some time.
1 Page share price peaked at $5.69 – gleefully reported as a 2700% increase, but over the issue price. The stock price has cooled but some investors will see the addition of a major corporation like Starbucks as a testimonial to the potential of this stock. The ability for corporations to use their own employees to source talent and then evaluating that talent based on real-world problem solving certainly sounds substantially disruptive. 1 Page is establishing operations here in Sydney, using its own platform to find and hire talent. Here is a one month price chart showing the fall in stock price.
Reffind Ltd (RFN) is another company blazing a trail in innovative Human Resource technology software and the smallest and most recent ASX entry in our table. Reffind is already being hyped as the “next 1 Page.” The company uses a cloud-based software platform that fundamentally changes the way businesses communicate with their employees.
Mobile access is a key feature that differentiates this approach from traditional emails, voicemails, corporate presentations, and even video feeds. The platform has three distinct legs, with one to be added. Available now are Employ – a means of using existing employees for job referrals; Engage – communication with and feedback from employees; Embrace – a way for employees to be rewarded based on peer recognition; and Educate – training videos in short formats (under development).
The company founders placed their shares in escrow for two years following the listing; a move to assure investors they are in for a long haul. In addition, rather than touting the company’s growth potential, a recent interview contained comments strongly suggesting the possibility of profitability as early as 2016.
Reffind trod the same path as Freelancer and 1 Page, with the share price falling following the initial burst of investor exuberance. Here is the chart.
Of the remaining two stocks in the table, Covata Ltd (CVT) follows the pattern of rise and fall while Norwood Systems (NOR) broke the mold with a slow and steadily rising share price, although it has only been trading as a new entity since June. Here is the chart comparing the two.
Over the long term Covata should benefit from the growing concern for data security. The company has been in business as a private entity for four years and offers an approach to data security that certainly sounds disruptive. The company’s position is that the internet was meant for data to be shared and thus is inherently insecure. In their view the current approaches to data security that center on protecting networks and servers with firewalls and virus protection misses the point.
The Covata approach is to secure data and files via encryption at the time of their creation. Data can be retrieved by customers and corporate employees with access keys, stored separately from the data either internally or with a cloud provider. The product goes by the name Safe Share. What this company can do was enough to attract the attention of global IT powerhouse Cisco Systems. Cisco signed a 10 year licensing agreement to offer Covata’s platform and Safe Share to Cisco customers. TPG Telecom has an ownership interest in the company. Covata has offices in London and Washington, DC where it focuses on the US military and other government agencies. The stock price hit an all-time high of $0.69 in April, following the 26 March announcement of the Cisco deal.
Norwood Systems (NOR) is a telco firm which initially focused on enterprise customers. The company’s technology can substantially lower the high costs corporations pay for international roaming charges. According to the Norwood CEO, corporate travelers are paying anywhere from $1.00 to $6.50 per minute for international calls. Norwood offers its customers a product called CORONA (Corporate Roaming Network Access) where they pay $0.45 per minute.
CORONA is a cloud based platform which enterprise users’ access via an app called Work Phone to access the network without changing SIM cards.
The company now offers the same service to individuals through an app called World Phone, a pre-paid service. World Phone connects users to local networks via its Europa system, again without changing SIM cards.
Apple began offering the World Phone app for iPhones back in June, with 1 million downloads in less than four months. Norwood just released an Android World Phone app, with 350,000 downloads in a matter of days. The company’s December Quarterly Update showed a 36% increase in revenue.
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