3 growing tech small caps you need on your watch list

3 tech small caps worthy of a closer look including Senetas Corporation Limited (ASX:SEN).

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

My portfolio is dominated by small caps for the simple reason that if chosen wisely they can deliver superior returns compared to large stocks. However, most small companies stay small and so I try to look for ones with scalable, capital light business models operating in favourable industries. Here are three tech businesses that I think share these qualities.

Mitula Group Ltd (ASX: MUA) aggregates online car, job and house ads on its websites and has a presence in 49 countries. It makes money through displaying Google AdSense adverts and also by charging third party sites directly on a cost per click basis.

As my colleague Tom Richardson said in this article, Mitula is well placed to benefit from the growth of the digital economy, particularly in the developing world. Another attractive feature of Mitula's business is that it can easily expand into new verticals, leveraging its existing user base whilst incurring little additional cost. To this end, the company has recently launched a fashion vertical in Spain.

Aerial mapping company Nearmap Ltd (ASX: NEA) is a very simple business. It sells high resolution aerial photomaps to businesses under a Software as a Service (SaaS) model. Nearmap regularly updates its maps and users are able to view up to date images and monitor changes over time.

Nearmap enjoys a couple of major competitive advantages as a first mover. Firstly, it can spread capture and R&D costs over a large and growing user base, and secondly its vast historical database cannot be replicated.

The company has recently expanded into the giant US market and this venture is still in its investment phase which has temporarily suppressed group profits. Meanwhile, the Australian business is growing strongly and generated $11.7 million in free cash in 2016 after paying for all product and technology investments.

Senetas Corporation Limited (ASX: SEN) makes hardware which robustly and rapidly encrypts data so that it can be safely sent between different locations. The company's products are certified by four major authorities and are among the most advanced of their type in the world. Certification is important to customers and can take years to achieve so represents a barrier to entry for potential competitors.

Senetas' products are distributed by European company Gemalto, a global leader in data security. It will be interesting to see if the new "EU-US Privacy Shield" agreement, which requires all EU corporations to protect transmitted data, will boost sales in Europe this year.

I wouldn't be surprised to see growth in 2017 given revenue rose 150% between 2013 and 2016. Gross margins are over 80% and so most of any incremental revenue will fall to the bottom line.

Motley Fool contributor Matt Brazier owns shares of Nearmap Ltd. and Senetas. Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »