6 Stocks to Benefit from Technology Trends

Throughout history investors have benefited handsomely from getting onboard stgeloping trends that have the capability to transform the way things are done. Perhaps more so than in any other contemporary field, information technology has produced disruptive technologies at a dizzying pace.

Over the past few years analyst firms like Deloitte, Accenture, and McKinsey have produced reports highlighting “mega-trends” in information technology.  Here are the most commonly identified:

•    Internet of “Things”

•    Cloud Computing

•    Software as a Service (SaaS)

•    Platform as a Service (PaaS)

•    Data Analytics

We found five information technology stocks that should benefit from these trends.  In addition, we found a newer entry into the Online Shopping arena; this is a maturing trend in which marketing firms tell us Australia has lagged behind much of the rest of the industrialised world.

First let’s list the stocks.  Then we will discuss how each fits into the mega-trends mentioned above.  Here is the table, ranked by market cap.

The first mega-trend – the Internet of Things – has the potential to benefit all companies involved in any way with the web.  Why?  Because the web is about to get a lot bigger.  The Internet as we currently know it is really an Internet of “People.”  People are connected with each other and enter and use information.  We already have some examples of “things”, or machines, connected to the net and entering information for use by both people and other machines.  Home automation systems allow us to remotely check if we forgot to turn the lights or the stove off. Utility meters monitor energy usage which can “tell” other machines when more power is needed in a given area. Mobile stgices are going “wearable”, beginning with watches.  

The additional data requirements for the Internet of Things spell massive increases in the need for data storage and transmission capability. Cloud omputing offers an answer for the storage needs.  What is the “cloud?”  Older investors might recall touring large corporations in the 1970’s and marveling at entire floors stgoted to computer hardware. The cloud is nothing more than that hardware at a location other than your own office or home.  Instead of investing in buying and maintaining their own network servers and other hardware, companies pay Cloud Providers to share their hardware.

Software as a Service (SaaS) and Platform as a Service (PaaS) are subsets of Cloud Computing.  In times past both consumers and corporations bought, installed, and maintained needed software applications.  Now we have the option of paying to use software from a provider, housed and maintained on the provider’s site.  Platform as a Service provides needed hardware, infrastructure, and software for computer applications.  Some companies are opting for “Hybrid” Cloud Computing, maintaining some of their own hardware and applications on site.

Finally, Data Analytics, or Big Data Analytics, is the collection and analysis of complex data from a variety of sources such as Wi-Fi, social media, and e-Commerce websites.  Consider the data sources and you realise the amount of information is potentially huge and likely to be unwieldy and unstructured.  There are a growing number of companies with the technology to gather and analyse this morass of data to provide crucial business information to clients about their customers and overall market trends.

The first stock in our table, NEXTDC Limited (NXT) is a data-centre as service provider with five operational sites, located in Sydney, Canberra, Melbourne, Perth, and Brisbane.  In 2014 the company topped the Deloitte Top 50 Fastest Growing Technology Companies Index, with an impressive 3,626% increase in revenue over the past three years.  However, the company has not managed to translate that revenue into profit over the last three years, posting a loss of $22.9 million in FY 2014.  The 2 year estimated EPS growth of 38.2% suggests the company is moving in the right direction, but that increase represents a move from a loss of $0.11 per share in 2014 to an estimated loss of $0.01 in FY 2016.

The company is relatively new to the ASX, commencing trading on 09 December 2010 with a first day close of $1.60 per share.  Investors were apparently enthused about the company’s prospects as the share price peaked at $2.86 in mid-2013 but has been falling ever since.  Here is the chart.

Analysts have a consensus Overweight rating on NXT, with 5 Buys, 1 Hold, and 1 Underweight.  Despite the tailwinds NXT can expect from the demand for Cloud Computing and related services, this company is not without significant risk.  Competition in the space is fierce, with local Telco’s as well as big international players like Amazon, Microsoft, and Google in the hunt.  In addition, costs of maintaining and replacing equipment are substantial.

Infomedia Limited (IFM) is a SaaS and Data Analytic provider to the global automotive industry.  The company operates in more than 186 countries, serving over 140,000 auto dealership personnel with online parts selling systems and menu pricing systems.  Infomedia also offers information research and data analysis to its customers.  

The company has increased both revenue and net profit in each year of the last three, with revenues rising from $45.7 million in FY 2012 to $57.1 million in FY 2014.  NPAT increased from $8.5 million to $12.3 million. The company pays a fully franked dividend with the current yield at 4.5% and has rewarded shareholders with an average annual rate of total shareholder return (dividends plus appreciation) of 36.3% over five years and 12.3% over ten.  The current P/E of 20.84 may seem a bit lofty to some, but the P/E for the Software and Services Sector of which IFM is a part stands at 21.22.

On January of this year the company announced it was losing some contracts and revised profit guidance downward from $14.5 million to $13.7.  The share price dropped from $1.15 to $0.98 and has continued to fall.  Over five years the share price is up 200%.  Here is a five year price movement chart for IFM.

Nearmap Limited (NEA) provides high definition aerial image mapping solutions to businesses and government organisations.  The company’s customers range from construction companies to defence companies to architectural firms and local governments.  Nearmap has a trademarked technology called PhotoMap ™ which allows the company to create and update customised maps for specific customer needs.  The maps can be accessed online.  In October 2014 the company announced it was moving into the US market and shareholders reacted with enthusiasm.  Here is a six month price chart showing the move.

The company’s Full Year 2014 results were outstanding, with a 62% increase in revenue and a swing from a loss of $1 million in FY 2013 to a profit of $7.1 million, an increase of close to 800%.  During the year Nearmap entered into a licensing agreement with Google Maps and introduced a number of new products to serve the rail, solar, property, and insurance sectors.  The company has a consensus Buy rating, with 2 analysts at Buy and 1 at Overweight.

Praemium Limited (PPS) is a SaaS provider to the wealth management sector.  The company provides technology solutions to financial professionals, including investment managers, financial advisors, banks, and accountants.  Solutions range from portfolio administration software on the Internet to a promising offering for retail investors, Separately Managed Accounts (SMA).  An SMA is something like a hybrid, combining individual stock selection with professional investment management advice characteristic of mutual funds.  Some analysts feel the SMA’s Praemium offers will allow the company’s customers to get greater penetration of the SMSF market.

In July 2014 those analysts appear to have been proven right as Praemium announced record inflows into the company’s SMA offerings.  The share price rocketed and after a brief drop resumed its upward trajectory, reaching a new 52 week high.  PPS has only one analyst covering the stock with a Buy rating.  A one year price chart shows the rise of this little-known company.

The final two stocks could be considered mini- micro-caps.  However, these are penny dreadfuls that may surprise.  In December 2013 an Internet advertising company called AdEffective (ABN) changed its name to Shoply Limited (SHP), beginning a transition away from a dual focused online advertising company and an online shopping company.  The company had maintained its advertising business but saw limited growth potential there and began expanding its online shopping presence with the acquisition of three new sites in 2014.  The company has continued its buying, buffeted by organic growth, and now boasts seven online shopping sites, with the most recent addition the launch of a new site, toystore.com.  The market reacted positively to Shoply’s name change and focus on online shopping, but the share price has cooled off since.  Here is a two year price movement chart for SHP.

The company is now debt free, with $3.5 million in total cash as of the most recent quarter (MRQ).  At its 2014 Annual General Meeting (AGM) Shoply announced the loss of search engine advertising revenue from Yahoo and the online advertising business apparently is effectively over.  The company now describes itself as a “pure-play” online shopping company.  Online shopping is a highly competitive space but the company believes its scalable technology platform will allow for expansion of its sites as needed.  This is a speculative stock at best, but online shopping here is a $12.4 billion dollar market according to IBISWorld as of October 2013.

SkyFii Limited (SKF) is a Big Data Analytics company that went public in November 2014 through a reverse takeover from the defunct funds management company RKS Consolidated.  SkyFii was formed in 2013 and gathers and analyses customer information for use by retailers and shopping centre operators.   A unique feature of the company’s business model is the free Wi-Fi it offers customers in exchange for their agreement to allow SkyFii to track their browsing and buying habits.  The company has enticements such as rewards programs in place to keep consumers on their Wi-Fi hotspots.  SkyFii’s Wi-Fi subscriber base is already at 300,000.

The offering was oversubscribed at $0.20 and SKF closed its first trading day at $0.22.  Less than one week after it began trading, SkyFii announced a 50/50 joint venture to enter the Indonesian market.  The company has pilot projects in place in South Africa and Brazil as well.  On 20 January SkyFii announced an agreement with Mnet Mobile, the leading mobile agency here in Australia, for Mnet to market SkyFii’s services throughout Australia and New Zealand.  This is a thinly traded penny stock with no analyst coverage. But considering how far this tiny company has come in two years, it deserves a look and a place on the watch list of any investor with a little risk tolerance.