When it comes to looking for tech stocks to buy, the consumer names are the ones that tend to get the media in a tizzy. There’s nothing wrong with this, as Facebook Inc (NASDAQ:FB) and Apple Inc. (NASDAQ:AAPL) absolutely reek of cash.
But don’t underestimate the lesser-known tech stocks! These companies are often working in the background, providing the core services of the cloud or mobile, or are focused on helping corporate customers improve their operations.
That means there’s money to be made, as these companies can offer more pure plays than their heavily diversified “big brother” tech stocks. In fact, a lot of the recent spark in M&A activity has been focused on the lesser-known tech stocks. Look no further than Verizon Communications Inc.’s (NYSE:VZ) $2.4 billion purchase of FleetMatics Group PLC (NYSE:FLTX); or Salesforce.com, inc.’s (NYSE:CRM) $2.8 billion acquisition of Demandware Inc (NYSE:DWRE).
Got your attention, eh? Good. Now it’s time to stop scanning the surface and time to look under the radar for tech stocks to buy … and I’ve got just the stocks to get you started:
Tech Stocks to Buy: Alarm.com
AlarmCom Hldg Inc (NASDAQ:ALRM) operates a cloud-based platform for home automation, including features like security, video monitoring, energy management and intelligent automation (such as the opening of doors). The company is one of the leaders in the industry — with over 2.6 million residential and business subscribers.
There are several key parts of the company’s successful go-to-market strategy. First of all, Alarm.com has built a network of over 6,000 service providers who help with selling, installations and maintenance. But the company also has been smart in making the platform highly versatile, allowing for seamless connections with many devices like the Apple TV and the Echo from Amazon.com, Inc. (NASDAQ:AMZN).
Then again, Alarm.com has an obsessive focus on engineering. Keep in mind that the company releases a new version of its software each week.
At the same time, Alarm.com has also been aggressive with M&A. In fact, the latest deal for various assets of Icontrol Networks could move the needle. With it, Alarm.com gets the security and home automation platform of ADT Pulse, which has over 1.6 million subscribers.
But there are secular forces that should make Alarm.com a compelling choice among tech stocks. Just some include the wide adoption of mobile devices, the growth in the Internet-of-Things market, the power of Big Data analytics and the power of the cloud. As Alarm.com noted in its IPO filing:
“Security systems, thermostats, door locks, video cameras, lights, garage doors, appliances and other devices that were once inert now have the potential to become sensor-enabled, intelligent and connected.”
Tech Stocks to Buy: AppFolio Inc (APPF)
When it comes to small law firms and real estate rental companies, the market for technology has been mostly filled with niche players. But AppFolio Inc (NASDAQ:APPF) wants to change this. Over the years, the company has put together a top-notch cloud platform to help with functions like payments, invoicing, workflow management and tenant screening.
It certainly helps that the team includes some of the pioneers of cloud computing. For example, Klaus Schauser was the mastermind behind breakout offerings like Citrix Systems, Inc.’s (NASDAQ:CTXS) GoToMyPC and GoToMeeting.
As for AppFolio, the company has continued to crank out strong growth. In the latest quarter, revenues spiked 46% to $23.2 million. And while the company continues to lose money, it looks like there should be positive Ebitda by 2017.
More importantly, there is plenty of room left to continue with the growth ramp. After all, the customer base for property managers is only at over 8,800 and it is more than 6,800 for law firms.
Tech Stocks to Buy: Paycom Software Inc (PAYC)
Back in 1998, Chad Richison believed that the internet would be the next platform for business applications. It was certainly a bold vision since many people still used dial-up modems! Oh, and Richison did not even start the business in Silicon Valley; instead, he set things up in Oklahoma City.
Yet, the plan still worked out quite well — and a critical factor was that Richison focused his company — called Paycom Software Inc (NYSE:PAYC) — on core business functions, such as payroll processing. Then over the years, he was aggressive in adding more and more features like talent management, background checks and HR systems.
As of now, PAYC is one of the fastest growing cloud operators. In Q2, the company reported revenues of $73.9 million, up 51%, and Ebitda was $22.6 million.
Consider that the company was smart to invest early in a product to help companies deal with the complexities of the Affordable Care Act (or Obamacare).
Something else: It looks like PAYC will do something similar for 2017 — that is, with the new federal regulations for overtime pay. The company has new tools that will help with managing the complexities of adjusting compensation across an organization.
The impact could be even stronger. According to Richison: “We believe the FLSA (Fair Labor Standards Act) potentially will have significantly greater financial impact to clients in the mid-market than the ACA.”
No doubt, this is the kind of thing that should help keep PAYC on the list of high-growth tech stocks.
Tech Stocks to Buy: Cotiviti Holdings Inc (COTV)
The administration of the U.S. healthcare system is mind-numbingly complex. There are thousands of regulations, various reimbursement models and plenty of coding requirements. Meanwhile, the healthcare process involves various steps, such as claim submissions, claim adjudications, pre-payment review, payment and post-payment review.
Given all this, is it any wonder that there is waste and inefficiencies?
Of course not. But then again, this has been very good for Cotiviti Holdings Inc (NYSE:COTV). The company has built a massive digital system that helps healthcare companies and retailers to deal with the complications. A key part is a heavy investment in cutting-edge analytics, big data and machine learning. This technology is applied across the key steps of the claims processing cycle – in real-time.
The result? Well, COTV has achieved substantial savings for customers. In fact, the amount came to over $2.7 billion in 2015.
As a testament to the prowess of the COTV technology, the company’s ten largest healthcare clients have been on board for about 10 years. Since 2013, the firm has only lost one customer.
So it should be no surprise that COTV has impressive financials. Last year the company posted revenues of $541.3 million, up 23% and adjusted Ebitda of $203.4 million.
COTV also has a fairly capital light model. Capital expenditures as a percentage of revenues were about 4.2% in 2015.
The market opportunity is definitely enormous as well. In 2015, healthcare expenditures came to about $3.2 billion. What’s more, the CMS predicts that these costs will increase by 5.9% per year until 2024 because of the aging demographics in the U.S.
Tech Stocks to Buy: Zendesk Inc (ZEN)
The amazing story of Uber has much to do with the company’s standout focus on customer service.
Ok then, so what kinds of cloud-based tools does it use?
Well, one of its top vendors is Zendesk Inc (NYSE:ZEN). Founded nearly a decade ago, the company has built a robust system that helps companies manage digital customer interactions, such as with live chat, voice, email, web FAQs and SMS. ZEN believes that it is focused on meeting the needs of the rapidly emerging “promoter economy,” in which customers are embolden with social media.
Granted, there are many types of customer-service applications on the market. But a key with Zen is that the company — from its inception — has been making software that is “nice to look at and easy to use.” While this may sound a bit simplistic, it has turned out to be spot on. Let’s face it, companies really need everyone involved in customer service — not just the customer service department.
The strategy has led to strong growth on the top-line. In the most recent quarter, revenues shot up by 54% to $74.2 million. In all, there are over 81,000 customers.
Even though the bulk of this base is of small and mid-market firms, ZEN has been getting traction with larger operators. In Q2, the company saw a 11% increase in the number of deals over $50,000.
In other words, ZEN has a chance to be a rare software company that can cater to the needs of any type of company — which means there is likely to be much more room for long-term growth.
Tech Stocks to Buy: ServiceNow Inc (NOW)
When looking for tech stocks to buy, Frank Slootman has been a CEO to bet on. Back in 2009, he sold Data Domain to EMC Corporation (NYSE:EMC), which resulted in standout returns for investors.
Then a few years later, Frank took the helm of ServiceNow Inc (NYSE:NOW), where he has also been able to rack up solid gains. Interestingly, he has the distinction of building the second $1 billion-plus revenue company in the cloud industry.
ServiceNow got its start by focusing on the tasks of automating service calls for IT issues. And the company got quick traction as its rivals essentially failed to innovate. A big factor for this was that most of the big players were part of much larger organizations, such as HP Inc (NYSE:HPQ).
But for ServiceNow, the IT business was just the first step in its journey. Over the years, the company has been leveraging the platform by moving into categories like HR, customer service management, security and so on.
This has meant that the growth rate has remained strong, despite the scale of the revenue base. In the latest quarter, the top-line came to $341.3 million, up 38%. Consider that 40% of the revenues came from new business.
Oh, and ServiceNow has put together a base of 272 large customers, which account for more than $1 million in annual revenues. In other words, the company’s technology is becoming very strategic — and this certainly bodes well for its long-term sustainability.
Tech Stocks to Buy: Criteo SA (ADR) (CRTO)
The ad-tech sector has been mostly awful for investors. Some of the issues have been lack of differentiation and slim margins.
But as the online ad market continues to remain strong — driven by the mobile revolution — shouldn’t there still be some good stocks to buy? I think so. And one good choice is Criteo SA (ADR) (NASDAQ:CRTO).
For the most part, the company has been focused on cutting-edge technologies, which help to optimize ad campaigns. But CRTO has also been smart to rethink the business model — that is, the company only charges it customers based on performance, not vague metrics like clicks or views.
This strategy has certainly been paying off nicely. In Q2, revenues increased by 36% to $407 million and adjusted Ebitda jumped by 66% to $39 million. The company also added more than 900 net clients, for a total of about 12,000.
But ultimately, CRTO may be a target for a buyout. In fact, Goldman Sachs Group Inc (NYSE:GS) put the company on its hot list for potential deals. With everything CRTO has going for it, it’s not hard to see why.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
