Businesses like Facebook and Netflix can grow so easily because of how cheap it is to expand their network. As long as the user has internet access, then they can expand their customer base at virtually no cost.
Although Australia doesn't have any large global tech companies, there are several excellent tech companies on the ASX that have exciting growth plans. When these companies grow revenue, most of the additional sales falls straight to the bottom line.
Here are three of the best technology stocks on the ASX in my opinion:
Class Ltd (ASX: CL1)
Class is the cloud-based accounting software provider for self-managed super funds (SMSFs). It has a market capitalisation of $351 million, which I expect to grow strongly over the coming years.
Automation is transforming a number of industries and accounting is no exception. Class' software is helping accountants prepare SMSF documents more quickly and efficiently. Class is steadily growing its market share of SMSFs and could capture additional SMSFs that move to the cloud.
Class is trading at 58x FY16's earnings with a grossed-up dividend yield of 1.9%.
Xero FPO NZX (ASX: XRO)
Xero is another cloud accounting software provider transforming the accounting industry with its user-friendly systems and automated processes.
It's growing subscribers at a rapid rate. In FY16 it grew total subscribers by 242,000 which boosted operating revenue by 67%.
Xero is now spending heavily to expand into the USA and UK markets. It will be important to monitor how much progress is being made there when Xero reports on 11 May 2017.
It isn't yet making a net profit or paying a dividend.
Link Administration Holdings Ltd (ASX: LNK)
Link offers superannuation fund administration software as well as investor services for many of the ASX's listed companies.
Link's superannuation customers include AustralianSuper and REST. Considering the predicted growth of the superannuation sector, this is a great place for Link to be operating.
In Link's half year report to 31 December 2016, it disclosed that operating earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 20% on the prior corresponding period and the operating EBITDA margin grew from 23% to 27%.
Link is trading at around 32x FY17's full year earnings with an unfranked dividend yield of 1.87%.
Foolish takeaway
None of these companies are trading cheaply, but the current prices may be good value considering how much they're expected to grow over the next few years. At the current prices my order of preference is Class, then Xero and finally Link. If you don't like tech companies, that's okay, these great blue chips could be the perfect fit for your portfolio instead.
