Our local market is very resource and bank-heavy. Ultimately that means that a large part of shareholder returns are dependent on Australia's housing industry, and the global price of resource commodities.
Yet savvy investors have found that technology companies like Carsales.Com Ltd (ASX: CAR) can offer returns well above that received by bank and resource shareholders over the years. Here are two more technology companies I like today:
XERO FPO NZX (ASX: XRO)
Xero is a cloud accounting software company. Thanks to the nature of its business, a relatively small team of engineers and marketers can sell software to millions of customers worldwide, which results in what is called 'operating leverage' – costs that stay relatively fixed while revenues (and profits) soar.
Xero is currently in the investment phase of its growth which means that its earnings power is somewhat masked by heavy expenditure as the company expands into multiple countries. However, this investment could result in the company becoming much larger over the next decade or more if it is able to achieve a foothold – bearing in mind that the markets it is moving into are much larger than Australia and its native New Zealand.
Nearmap Ltd (ASX: NEA)
Nearmap is a higher-risk aerial mapping company. Although unprofitable like Xero, it is not yet large enough to sustain itself (Xero could become profitable overnight by cutting back its investment spending).
However, Nearmap is much smaller and has a well-established business in Australia with very high profit margins. The company is investing heavily in the USA which is resulting in heavy cash expenditure, but recent customer wins there show that the company is making some headway.
Over time the company is likely also to benefit from the increasing use of technology to replace manual site visits; this is similar to the 'migration to the cloud' tailwind that propels Xero along. Nearmap is higher risk, but would be suitable for a smaller part of a portfolio and I have previously purchased shares within 10% of today's prices.
