Best in breed: Scott Phillips

Adding “tech” to a name can boost the share price, but make sure it’s warranted

It’s the sharemarket segment that is both all-inclusive and simultaneously hard to define: technology. I mean, we know it when we see it, but what is it, exactly? In the early 1910s, cars were “technology”. In the ’50s and ’60s, so were photocopiers. And the genius behind modern steel-making was groundbreaking at the time. None of those are considered technology any more.

Still, in 2021 the term can be nebulous. Is an ecommerce company a technology company or a retailer? Is a payment processor a financial services business or a technology business?

If you ask them, they’ll all say technology, of course. And for good reason: the suffix “tech” is worth a lot to the share price … and to the CEO’s prestige. So, we have fintech (financial technology), medtech (medical technology), regtech (regulatory technology) and the slightly longer-in-the-tooth biotech (biological technology). Beats banking, manufacturing, record-keeping and pharmaceuticals, respectively, huh?

Investors are our own worst enemies, of course: if we didn’t pay the big prices, the companies themselves would care less, and we’d end up paying less. But we don’t, and so they do. Indeed, there’s even a relatively new index – the ASX All Technology Index – to cater for (and make money from) those desires.

Given the arbitrary nature of the classification, I’m going to limit our search this month to companies whose business is primarily software – the truest definition of technology these days.

And there are some businesses with wonderful economics in this area. After all, you make it once and sell it as many times as possible, with each copy costing almost nothing to reproduce. Try that with photocopiers!

Not only are the economics attractive, but most sell their wares as “SaaS” – software-as-a-service – replacing the old “buy it once, use it forever” with “pay every single month (or year) for access”. Now, the latter has its benefits, of course, including regular updates, little to no downtime, and your software (hopefully) never goes out of date. So it’s a win for customers, but an even bigger win for those who climb to the top of the software mountain.

Lastly, most of these businesses are hiding their earnings lights under a bushel. Not all will succeed, of course, but those that make it will, at some point, be able to cut back on both marketing and development costs and their bottom lines will swell accordingly.

It’s said that “software is eating the world”. In essence, our world is becoming more computerised and connected, and software is driving that change. You can get everything from mine development and operations software (RPMGlobal) and sales enablement (Bigtincan) to fund platforms (Netwealth) and aerial mapping (Nearmap).

Those are all functions that previously were either done manually and/or inhouse, but whose new purveyors have made simpler, easier, more efficient and/or cheaper with SaaS offerings. The idea of software eating the world might feel like hyperbole (and it’s certainly an evocative image), but it’s also increasingly true.

Scott Phillips is The Motley Fool’s chief investment officer. You can reach him on Twitter @TMFScottP and via email ScottTheFool@gmail.com. This article contains general investment advice only (under AFSL 400691).