Identifying which technology companies are likely to succeed is no easy task.
A limited few may go on to be big hitters, some won't go anyway and (most) others will turn out to be a complete flop.
The network effect is a powerful force for many technology companies because it fuels their ability to add scale to operations. With a loyal customer base and the majority of their investments in fixed assets already completed, technology companies' profits margins can grow dramatically as more customers come online.
The problem is getting them to use the service in the first place. Which is why companies with a large amount of pre-existing customers have a significant advantage over the rest of the market.
And the smart CEOs recognise this advantage.
That's why dealers who already use Infomedia Limited's (ASX: IFM) Microcat will likely go on to use their Superservice automotive servicing tool. This, in time, will improve the company's product offering and its margins.
The same could be said for geospatial imagery provider, Nearmap Ltd (ASX: NEA). Its mapping technology is now being used to provide applications in insurance, solar panel quoting, property valuation and by companies in transportation and mining.
Both of these companies already have a loyal customer base, which has enabled them to remain profitable as they launch newer applications.
Although not yet profitable, accounting software provider XERO FPO NZ (ASX: XRO) already has a huge customer base (147,000 in Australia alone) and has already witnessed explosive revenue growth over the past few years.
Buy, Hold, or Sell?
I think all of these companies offer fantastic products and will prove to be absolute bargains at today's prices, if things go according to plan. However in the share market, nothing is ever guaranteed and investors would be wise to consider the risks before buying in.
At the moment I don't hold any of these stocks, but I will definitely be looking to add each of them to my portfolio in the near future. However, our top analysts have identified one Australian technology stock which could be even bigger and better than these three.
