Software-as-a-Service (SaaS) companies have provided some of the best returns in recent years.
The rise of cloud computing, automation and computer integration into systems has created efficiency gains for every business and individual who can take advantage of it.
Below are three companies that offer software that could keep growing strongly:
Class Ltd (ASX: CL1)
Class is a self-managed super fund (SMSF) software provider. It offers cloud software to accountants to make the administration of SMSFs easier.
At the end of FY16 a majority of SMSFs (71.8%) are still on non-cloud accounting software, Class has a 68% market share of the cloud accounting SMSF accounts.
The number of SMSFs continues to rise as people want more control over their money so they can invest in a wider range of options, Class can benefit from this growing trend.
In FY16 Class grew its portfolio of billable clients by 37%, which helped grow its revenue by 45% and its net profit after tax by 71%.
Class is trading at 44.4x FY17's estimated earnings, with a dividend yield of 1.29% which will be fully franked from December 2016 onwards.
Hansen Technologies Limited (ASX: HSN)
Hansen Technologies is a global provider of billing systems for utility companies (electricity, gas and water), telecommunications and pay TV operators. It currently has around 200 clients spread across 40 countries.
Utility companies are usually seen as some of the most defensive stocks because people always use them, so providing a service to these utility companies would likely also have defensive characteristics.
In FY16 Hansen grew its revenue by 40%, its earnings per share by 42% and its dividend by 16.6%.
Hansen is currently trading at 28.9x FY17's estimated earnings, with a dividend yield of 1.41%.
Gentrack is a New Zealand-based company that's similar to Hansen in that it provides software to electricity, gas and utility companies. It also provides software for airports.
Its customers include 51 utility sites and 61 airports which are predominantly in New Zealand, Australia and the U.K.
For the 12 months to 30 September 2016 Gentrack increased its revenue by 25% and achieved flat earnings per share.
Gentrack is currently trading at 26.3x FY16's earnings with a dividend yield of 3.36%
Foolish takeaway
All three of these software companies are trading with high price/earnings ratios, but they operate in relatively stable industries.
At these prices I think Class looks like the better buy, but I wouldn't be surprised to see a cheaper entry price over the next two months. They are all staying on my watch list for now.
