Rising tech companies in Australia will struggle to find a better role model than Atlassian Corporation Plc, the Sydney-based and US listed software company that has gone from strength to strength since its IPO just three years ago.
Atlassian's share price has gone up almost 100% since the beginning of the year and with a US$21 billion market cap, it is now worth more than REA Group Limited (ASX: REA) and Qantas Airways Limited (ASX: QAN) combined!
If that sounds expensive to you, consider the size of the markets that Atlassian is targeting. Atlassian announced last night a US$295 million deal to acquire a Boston-based company called OpsGenie, Inc., whose technology enables companies to better plan for and respond to IT service disruptions.
This is a large market and Atlassian stated in the announcement that, "dealing with IT outages and downtime is one of the biggest technical challenges of the modern era, costing North American businesses an estimated US$700 billion per year".
ASX listed tech companies that are also looking to address large markets include:
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Afterpay Touch Group Ltd (ASX: APT) which is targeting the UK's £133 billion online retail sales market in addition to its growing US operations
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Xero Limited (ASX: XRO) which is using strategic alliances with platforms such as Gusto to grow its presence in North America and
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Altium Limited (ASX: ALU) which is looking to piggy back off the Internet of Things as a major growth driver
There are many more such companies but the real question is, can they replicate Atlassian's success?
I think its hard to say with certainty but the following factors may be good indicators of where these companies are headed:
- Bold, ambitious and invested leadership. To conquer the globe requires a management team who are bold enough to spend big on R&D, marketing and customer acquisition to acquire market share quickly before the competition catches on. All this while their personal net worth is at risk and tied to the business.
- High sales growth accompanied by expanding margins as the business scales.
- A strong balance sheet getting stronger. Growth stocks can be punished severely by the market if they miss expectations and the best way to survive those inevitable blips is with minimal debt and strong cash flow generation.
Foolish takeaway
I think there will be many more success stories from the Australian tech scene but given current valuations, there may also be some disappointments. My favoured approach to get some exposure would be to buy a basket of the best quality companies, starting off with a small position and then adding opportunistically along the way.
