I’ve been following Bitcoin’s hyper-cyclical movements ever since 2012. It’s been a wild ride and I’ve made some money along the way, but also lost a hefty amount. Over time, I’ve come to realise that focusing on robust technology companies with a proven track record is clearly a better way to accumulate wealth.
Once a technology company finds product-market fit, all it needs is good management and a long-term marketing strategy to create tremendous wealth for shareholders. Niche software companies that are creating solutions in an emerging industry are particularly attractive, simply because they have more room to grow.
With that in mind, here are two niche software companies I’ve recently added to my hyper-growth watch list.
Self-driving cars
The rise of self-driving vehicles now seems inevitable. Although the technology is nowhere near ready yet, I expect technology companies to keep making incremental progress until most cars have at least some self-driving features, if not full autonomy, within the next decade.
AB Dynamics (LSE: ABDP), which is based in Bradford on Avon, plays a key role in this incremental progress by providing automotive test systems for manufacturers. That means AB’s tools and software are useful today and are likely to be in high demand for the foreseeable future.
Fortunately, these services are also lucrative. AB generated £13.5m in adjusted operating income on £58.0m in revenue last year, indicating a profit margin of 23.3%. Sales and profits have both expanded by roughly 38% annually over the past five years.
Now, the company’s shares trade at a forward-looking price-to-earnings (P/E) ratio of 30.7, which means the P/E-to-growth (PEG) ratio is less than 1. In other words, this is a growth stock with immense potential that is fairly valued at the moment.
Marketing artificial intelligence
DotDigital Group (LSE: DOTD) is another high-growth, fairly valued tech stock that I believe is underestimated by the investment community.
The company provides enterprise software that helps corporations market their products and services online. Their flagship product, Engagement Cloud, helps clients automate their online campaigns and manage online communities with a data-driven framework. The platform has been popular enough to attract 70,000 corporate users from over 156 countries.
Altogether, the group has thousands of customers including several megabrands such as BP, ODEON, and Santander. Unsurprisingly, many of these corporations are repeat customers and long-term subscribers to the platform. In 2019, 86% of DotDigital’s revenue was reported as recurring.
Earnings per share expanded by 33% over the past year and management expects revenue to expand another 15% this year. That’s decent growth for a company currently valued at 24.5 times forward earnings.
Bottom line
Plenty of investors have made a killing by betting on Bitcoin over the years. However, the cryptocurrency is simply too volatile for my taste now. Instead, I prefer to focus on companies developing proven technologies that are clearly in demand. Over the long term, I expect these niche software providers to deliver substantial growth for my portfolio.