Software Week: 5 Software Stocks We Like

It won’t surprise readers at all that we like software stocks at A Rich Life. In fact, it’s one of our favourite hunting grounds, and both @fabregasto and I are relatively overweight software in our portfolios vis-à-vis other sectors. I know that more than half of Fabregasto’s portfolio consists of software stocks, and if you exclude my cash and gold holdings, the same is true for me.

While readers will likely be very familiar with high-flying software & technology names such as Xero (ASX: XRO), Pro Medicus (ASX: PME) and Appen (ASX: APX) , the ASX software space includes a number of other lesser known names – some of which listed last year during a time when quite a few software companies did their IPO. We believe that some of these smaller companies will evolve into larger and more well known names in time – indeed some of them are already competing on the world stage.

We like software for many reasons, but to paraphrase Marc Andreessen, we believe that Software as a service will keep eating the world for years to come.

One reason for this is that many software functions are still performed by in-house systems. Meantime, enterprise focussed software companies can specialise in solving a specific set of problems better than anyone else. Because software can be replicated and very low cost, once a company has a best-in-class solution for a set of problems, it is more economical for companies to use that solution, rather than build their own. As the best software gets better, it makes the companies that use it stronger, and then expands until it is doing more and more for those very companies. This creates a generalised flywheel where its customers get stronger and it becomes more important to them.

Software as a service also works on a psychological level. Just as Afterpay has touched the lives of many, simply by splitting one payment into four, Software as a Service offerings gain popularity by obviating the need for a large, cashflow smashing investment in a product that may or may not work as well as hoped. Instead of large capital expenditure, client companies simply pay as they go, recording the expense in operating expenditure. This often means they end up paying more, but just as Afterpay’s late fees do little to deter its acolytes, today’s CFO often prefers the pay-as-you-go option.

Finally, there is a plausible scenario under which central bank stimulus will prevent equities from falling and fiscal stimulus will prevent a severe recession. That possibility sees markets currently looking past the current pain, sending many top SaaS stocks soaring. Meanwhile, some of the smaller lesser known software stocks have not seen such violent share price growth. Whether or not we have more pain ahead as investors (and personally I think it’s likely that we do) I think each of the stocks we will feature have a good claim on a much brighter future.

And so, I’m proud to present A Rich Life‘s Software Week. Over the next week, Fabregasto and I will feature a handful of relatively lesser known ASX software companies – starting on Monday with an up and coming workplace management software company we both own shares in.

As each new post is published, I’ll link to it below.

Note: I own shares in Pro Medicus and Appen, while Fabregasto owns shares in Appen and Xero.

Stock 1: Damstra Holdings Ltd (ASX: DTC) Analysis And Description

Stock 2: PKS Holdings Ltd (ASX: PKS) Analysis And Description (Microcap Stock)

Stock 3: Urbanise.com Ltd (ASX: UBN) Analysis And Description

Stock 4: Whispir Ltd (ASX: WSP) Analysis And Description (Supporters First)

Stock 5: Fineos (ASX: FCL) Analysis And Description (Supporters First)