The Australian Financial Review is reporting that equity analysts at investment bank UBS have considered what might be the "big growth stocks" of the next two decades thanks to the explosive growth of the tech sector.
UBS reportedly is touting the growth of "data management" as a sector for investors to exploit with the shift to the cloud a business trend that continues to give investors plenty of opportunity to profit from.
However, the growth of the cloud is no secret and one of the commonest mistakes investors make is paying too much for fast-growing companies.
For example even companies with strong long-term growth trajectories may not represent good value if the hype around them has led investors to bid shares up to unrealistic prices.
According to the AFR, UBS identifies data centre business Nextdc Ltd (ASX: NXT) as being well positioned to serve the growing demand of businesses to store their data online. NextDc delivered a profit before tax of $8 million for the half-year ending December 31 2016, yet trades on a giant $1.2 billion valuation, which goes to show just how much growth and hype is already built into its $4.35 share price.
Other stocks UBS reportedly identifies as sitting in the data sweet spot are software-as-a-service construction management business Aconex Ltd (ASX: ACX) and online logistics management business WiseTech Global Ltd (ASX: WTC). Both these businesses also trade on giant valuations that are generally only reserved for the most exciting tech stocks with global growth opportunities.
Of the two I would prefer WiseTech Global as it is founder led and has a decent track record of meeting guidance and investor expectations as to its underlying operating performance.
However, Aconex has a poor track record as a public company with its founders selling shares and the company downgrading growth forecasts, while making big acquisitions in Europe. Its shares currently change hands for $4.47 and while it certainly has a big growth opportunity, I would wait until it demonstrates it can actually achieve robust underlying double-digit growth before potentially buying shares.
Another company UBS identifies as benefiting from the shift to the cloud is IT services business and share market stalwart Technology One Limited (ASX: TNE). Its shares are up 363% over the past five years as it benefits from the growth of the digital economy. It is Australia's largest enterprise software business and is forecasting it will post compound annual growth of 69% for its cloud services business between FY 2014 and FY 2022.
That kind of gangbusters compound growth is what means the cloud services sector is one to be in, although I would suggest investors buy the market leader in the space as data centres are essentially just commodities, where scale and financial firepower will count above all else. As such global leader Amazon Web Services will probably perform best, with NASDAQ-listed Amazon probably being the best stock to own in this space for multi-decade growth.
