It's an exciting task to try to find the 'next big thing' or the big blue chip of tomorrow whilst it's still a small business today.
There is no telling what industry the future star will be from, it could be healthcare, it could be software, it could be from any sector.
However, it's a lot easier for certain types of business to scale up without much capital or effort, Healthscope Ltd (ASX: HSO) is a good example of a business that isn't easily scalable, it has to build a whole new hospital to significantly boost revenue.
These businesses that can easily scale up also generate extra profit very quickly because they have already built the infrastructure needed, so most of the extra revenue just falls straight onto the bottom line. Good examples of this are website or software businesses such as Seek Limited (ASX: SEK).
There is still a lot of growth to come from businesses like Seek and REA Group Limited (ASX:REA), but I think there is even more to come from Altium Limited (ASX: ALU).
Here are three reasons why it's in my portfolio and it should be in your portfolio too:
Growing industry
Altium is one of the largest electronic printed circuit board design software providers in the world. It helps engineers design the products of the future. Some of the companies using Altium include NASA, Microsoft, BMW and CSIRO just to name a few.
Many products will soon be interconnected to the 'Internet of Things' that requires more complex design and systems. Altium is perfectly positioned to benefit from this growing trend and management are confidently predicting doubling revenue over the next few years.
Great and cheaper product
Electronic PCB software companies have very sticky customer bases, which makes it easy to hold onto clients, but hard to win more.
Altium is rated as having the best software out of all its major competitors, whilst also having a much cheaper price. This allows Altium to slowly build its global market share, hopefully it has grown it again when it reports on 17 February 2017.
Strong results
Altium has been a great investment for shareholders. It has given a total return over the last 5 years of 628% and the last 3 years of 168.3%.
The reason why the shares have grown so much is because Altium has produced wonderful results each time it reports. In FY16 it grew revenue by 17%, the dividend by 25% and the earnings before interest, tax, depreciation and amortisation margin from 28.3% to 29.3%. It's this last statistic that will make Altium increasingly profitable with each dollar of revenue it earns.
Risks
There is always a risk that a software company can be usurped by an even better and cheaper product. As long as Altium keeps developing its offerings by spending an appropriate amount on research and development, it should be ok.
There is also a risk of foreign exposure with Altium considering it reports in US dollars and its headquarters are based in the USA. Any potential negatives affecting the USA could also affect Altium.
Foolish takeaway
Altium is trading at 25.9x FY17's estimated earnings with a partially franked dividend yield of 2.44%. I think this is a really good time to buy shares in Altium as it's predicted to have a strong next five years or so. However, if software businesses aren't your preference, you should check out our number one pick for 2017 which also has big growth plans and a large dividend.
