At first glance, software seems compelling.

Unlike mining or finance stocks, you can directly see and use the asset you are investing in.

Their stories of how the founders and developers came up with their idea are often compelling, and they can grow quicker and faster with less costs than businesses with a real world presence.

Also – who wants to miss out on the next Microsoft, Uber or Spotify?

But software stocks are far less simple. They involve a long and usually costly development process and once launched, weeks and months of trial and error persuading users they are better than existing solutions to the problem they are trying to fix – a problem which they may not even realise they have.

Here’s a quick guide to investing in software stocks.

The basics – apps

By software we can mean computer software or apps for tablets or smartphones.

In all cases they are written in a coding language (such as Python or Java) by computer programmers and tested before being launched.

There are two ‘app’ platforms – Android and iOS, designed by Google and Apple respectively. Some coding languages (‘hybrid’) allow one code to be written that is applicable across both. Others are unique (‘native’) to the operating system and in which case there will need to be separate code written for both operating system.

While most ‘software stocks’ will move into both, the one they decide to start in will depend on several factors. iOS is perceived as a ‘premium’ brand because of its association with Apple’s iPhones. iPhone users generally earn more and spend more money per app.

However, Android has at least 3 times more users than iOS – likely because of the wider variety of devices you can access them on, and in many cases, devices that cost a lot less than Apple devices.

Spotify CEO Daniel Elk – ‘freemium’ is a proven winner. Picture: Getty Images

The benefits

Although software development is costly and comprehensive, it is almost certain that software will be developed by the time the company lists. While they’ll require ongoing maintenance, it will either be managed within the Company or the web/app developer may be kept on in case maintenance work is needed.

If it’s the latter, they will be paid a retainer smaller than during the development process – likely a flat fee with additional hourly rates for specific work.

While many mining stocks will list before they have begun exploration, some even before feasibility studies, software and apps will be complete and likely have some traction. That is to say they will have a user base, some cash at bank and at least modest revenue, making set targets more achievable – particularly if they can indicate they achieved similar goals in the past.

Also unlike many other stocks, you can see first-hand the impact your stock is having.

If it is an app; most likely you will be able to download it from the App Store or Google Play and use it for yourself. Even if you do not need it, you may have a family member or a friend with the problem the app is trying to solve.

Of course, when you invest you want a financial return but it’s also great to make a positive difference in society, right?

It’s important to note that sometimes, apps and software may only be made available to revenue partners, to ensure revenue can be generated.

The risks

Every software company dreams of a larger company acquiring them. Facebook spent US$19 billion on swallowing up WhatsApp when it had only 20 employees. Apple has made dozens and dozens of acquisitions from Chomp (a search engine that searched for apps on what they did rather than what they were called) to Beddit (sleep tracking hardware); as have Microsoft and Amazon.

But it is equally likely that a larger company may try to crush it by adopting its features. For instance, Facebook bought Instagram and has ever since fended off constant allegations it copies Snapchat’s features. That scenario is more likely than the former, especially in the early stages of development.

While many businesses can protect their work with patents or claiming IP, it’s very difficult in the software industry. Only once the Company has a reputation, solid user base, revenue growth and team will bigger companies realise it’s perhaps easier to cough up and buy the product than dedicate their own team to creating a similar product.

Picture: 20th Century Fox

 

And as with any other company, users should look for revenue and a path to profitability.

Some may not mention profitability – they will just hope they will be acquired. But what happens if the acquisition never eventuates?

Few apps that aspire to be acquired even cover such scenarios. Uber has shown that a tech firm can survive off continual capital raises while staying private.

But once they go public, investors have to see profitability or at least a clear path to it.

Additionally software can have problems and need regular maintenance. There is a risk the Company will not hire the right people or firm to do the job and be left significantly out of pocket for no benefit.

Look no further than Appster to see the consequences of poor service among app developers.

It aspired in 2018 to be a $100m-a-year company. It ended the year liquidated with numerous clients being left out of pocket.

There also comes the risks of the industry the software is trying to disrupt. Suppose your software stock wanted to monitor the growth of sugar canes. Sugar cane farms in Australia face weather risks (particularly in the stormy season), large costs of maintenance and they usually sell to only one or two large monopsony buyers which could easily decide to stop buying.

The best picks

What should you look for when deciding to invest in an software? The best investment opportunities will have these four traits:

  • Multiple revenue sources. Some will stress partnerships with brick and mortar businesses as a measure of its success. Others may run ads within their platform. But you should look positively on those with a ‘freemium’ model such as Spotify where basic uses can be undertaken for free but one can pay extra for additional services, unlimited use or even simply to avoid ads.
Picture: BBC
  • Realistic targets. At Uber’s initial desk pitch 10 years ago it had a slide outlining future scenarios. Best-Case was, ‘Becom[ing] a market leader, $1B+ in yearly revenue’. Realistic Success Scenario was, ‘Gets 5% of the top 5 US cities; Generates 20-30M+ per year profit’. In 2017, Uber’s actual revenue was $11.3bn, making even the best case seem cautious. But nine years earlier, Travis Kalanick and Garrett Camp intended Uber to just be a luxury car service for time-poor executives, starting in San Francisco. A decade on, it has pivoted far, far beyond that.
A slide from Uber’s original pitch. Image: Uber
  • An experienced team. This should obviously start with the founder but look to the rest of the team as well. Ideally they will have been with the business for some time prior to listing and be committed for the long haul. Don’t expect the founder to have literally all the skills to do everything but will at least be a good salesperson, and even if they are not a career web or app developer, they should at least know enough to see progress occurring as well as to identify and resolve problems. Uber was Travis Kalanick’s 3rd startup. His second was acquired but his first was forcibly shut down by the US government. And Spotify’s Daniel Elk had been building software since he was 13 and had sold a startup before.
  • An aim to resolve a serious problem. Especially a problem identified by a user base that is willing to take action. For instance, YPB Systems (ASX: YPB) have an app that helps people identify counterfeit goods, through verifying the presence of invisible anti-counterfeit marks. Counterfeit goods are a significant problem for businesses and consumers. While there are already anti-counterfeit detectors, such as scanners, these are expensive. YPB offers a simple app that does this.

The software sector is quickly growing and is one of the easiest to see in action first-hand.

But like every sector, it has its own unique risks – in addition to the general risks of investing in equities.

Here’s a table of ASX software stocks>>>

Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop

TickerNameShare Price (16 January) Market Cap One Year Total Return %6 Month Total Return %1 Month Total Return %1 Week Total Return %
8CO 8COMMON 0.031 $4,955,487.50 -26.1905-38-11.4286-11.4286
9SP 9 SPOKES INTERNATIONAL 0.013 $7,429,068.00 -78.2609-51.6129-21.0526-11.7647
ADA ADACEL TECHNOLOGIES 0.67 $51,765,120.00 -71.3591-61.6667-1.4925-1.4925
ADJ ADSLOT 0.046 $57,120,252.00 17.948743.752.222212.1951
ALU ALTIUM 23.87 $3,052,664,576.00 67.58079.6787.53336.9438
AO1 ASSETOWL 0.019 $1,787,701.38 -81.037-42.8571-16.66670
BID BIDENERGY 1.49 $156,272,096.00 1596.8326172.331151.51522.7397
BTH BIGTINCAN HOLDINGS 0.34 $70,977,864.00 -26.59576.153816.949213.1148
BRN BRAINCHIP HOLDINGS 0.088 $92,389,752.00 -59.0698-41.3333-23.4783-8.3333
BVS BRAVURA SOLUTIONS 4.15 $901,976,064.00 131.398931.230811.64023.1785
BIQ BUILDINGIQ INC-CDI0.04 $9,968,953.00 -63.6364-39.39398.10810
CAG CAPE RANGE 1.51 $125,487,448.00 571.1111302.6667-11.95341.0033
CWL CHANT WEST HOLDINGS 0.055 $6,815,809.00 -8.333325-8.33330
CL1 CLASS 1.37 $154,137,296.00 -57.1766-38.8841-13.8614-13.4328
CXZ CONNEXION TELEMATICS 0.012 $11,790,312.00 3016030-7.1429
COO CORUM GROUP 0.026 $6,660,357.50 -33.333313.0435-16.129-16.129
DCC DIGITALX 0.045 $22,985,520.00 -87.8947-49.4505-8-11.5385
DTS DRAGONTAIL SYSTEMS 0.17 $42,160,000.00 -3213.3333-2.85710
DSE DROPSUITE 0.03 $14,407,416.00 -46.5517-77.03714.814819.2308
DUB DUBBER CORP 0.4 $59,376,068.00 -15.7895-10.1124-11.11110
ELO ELMO SOFTWARE 5.32 $334,966,304.00 -1.3011-6.8421-1.4842-0.9328
EOL ENERGY ONE 1.14 $23,652,644.00 60.6634.83976.73085.7143
EVS ENVIROSUITE 0.072 $23,284,976.00 -4.109634.615434.61542.9412
ESV ESERVGLOBAL 0.091 $110,187,408.00 -59.5556-39.33334.597718.1818
FAM FAMILY INSIGHTS GROUP 0.002 $4,155,776.75 -79.1667-33.333300
FGO FLAMINGO AI 0.016 $17,922,044.00 -78.9474-55.5556-15.7895-11.1111
GSW GETSWIFT 0.415 $76,352,344.00 -86.908515.27782.46917.7922
GOO GOOROO VENTURES 0.055 $5,209,964.00 -29.9557-18.9487-17.77415.7692
HSN HANSEN TECHNOLOGIES 3.48 $695,597,952.00 -4.200313.49392.64711.1594
HSC HOMESTAY CARE 0.038 $26,409,974.00 74.95449.9605-2.56418.5714
ID8 IDENTITII 0.68 $37,023,116.00 1.4925-2.8571
IME IMEXHS 0.033 $29,621,030.00 13.333313.3333363.0303
IFM INFOMEDIA 1.225 $382,722,464.00 49.170927.876413.36413.7975
IRI INTEGRATED RESEARCH 2.2 $374,569,248.00 -43.4027-8.909929.618832.3353
IHR INTELLIHR HOLDINGS 0.175 $14,224,518.00 -503550
IAM INTIGER GROUP 0.009 $13,423,167.00 -30.7692-50-10-10
IOD IODM 0.018 $8,915,726.00 8028.57145.88230
IRE IRESS 11.52 $1,999,307,392.00 3.3093-1.1966.77185.4029
ISD ISENTIA GROUP 0.295 $59,000,000.00 -78.4704-62.42045.35711.7241
ISX ISIGNTHIS 0.15 $161,538,528.00 -6.25-25-9.09093.4483
IXU IXUP 0.1 $16,636,594.00 -79.1667-64.28575.2632-9.0909
JAN JANISON EDUCATION GROUP 0.365 $52,387,096.00 -18.8889-15.1163-12.0482-3.9474
JCS JCURVE SOLUTIONS 0.042 $13,769,990.00 -2.325635.483902.439
KNO KNOSYS 0.055 $7,877,956.50 0-15.3846-11.2903-8.3333
KYK KYCKR 0.07 $10,567,542.00 -72-54.8387-12.50
LNU LINIUS TECHNOLOGIES 0.052 $50,657,268.00 -71.8919-26.7606-5.45451.9608
LVH LIVEHIRE 0.57 $144,527,536.00 -54.687522.105323.40439.434
LVT LIVETILES 0.37 $190,292,416.00 -17.9775-32.407428.07020
LVE LOVE GROUP GLOBAL 0.092 $4,072,547.25 1032-17.50
MTL MANALTO 0.001 $3,642,388.75 -85.7143000
MNW MINT PAYMENTS 0.029 $23,559,102.00 -38.2979-3.333311.538516
MBM MOBECOM 0.11 $23,878,932.00 -72.5-45-12-12
MOQ MOQ 0.2 $32,264,140.00 -9.0909-27.2727-13.0435-11.1111
MPW MSL SOLUTIONS 0.14 $34,977,652.00 -44-26.3158-9.67740
MYQ MYFIZIQ 0.285 $25,896,952.00 -79.0541-6.06068.77196.8966
MYO MYOB GROUP 3.365 $1,985,095,424.00 -2.566412.6447-5.35210.2985
NET NETLINKZ 0.027 $38,565,016.00 -10-18.1818-6.8965-10
NOR NORWOOD SYSTEMS 0.004 $5,769,283.00 -80.9524-42.857100
NOV NOVATTI GROUP 0.175 $26,776,416.00 -48.5294-16.6667-5.40540
OCL OBJECTIVE CORPORATION 2.79 $258,613,584.00 -5.3511-0.71797.30773.3333
OMN ONEMARKET 0.605 $62,877,128.00 -40.3941-11.02941.6807
OOK OOKAMI 0.011 $3,605,134.00 -90-38.888900
ODA ORCODA 0.18 $16,105,686.00 -52-31.4286-10-7.6923
OLV OTHERLEVELS HOLDINGS LIMITED0.024 $6,704,193.50 -20-46.6667-17.24140
PYG PAYGROUP 0.76 $39,270,316.00 -1.2987-11.11110
PIL PEPPERMINT INNOVATION 0.016 $15,801,319.00 -27.2727-2014.28576.6667
3DP POINTERRA 0.052 $25,018,710.00 -67.333328.947422.516.6667
PPS PRAEMIUM 0.76 $285,577,632.00 -6.4516-30.288511.53853.5714
RKN RECKON 0.685 $78,173,432.00 -55.02-21.96844.5802-0.7246
RFN REFFIND 0.007 $3,608,500.00 -85.1064-22.2222040
RD1 REGISTRY DIRECT 0.025 $3,231,999.75 -78.025538.8889-16.6667-16.6667
RUL RPMGLOBAL HOLDINGS 0.585 $126,405,352.00 -24.026-0.84751.7391-2.5
SCL SCHROLE GROUP 0.015 $9,470,553.00 -44.44447.14297.14290
SNS SENSEN NETWORKS 0.092 $36,832,788.00 -45.8824-45.8824-16.36364.5455
S3R SERPENTINE TECHNOLOGIES 0.003 $1,444,192.25 -76.923100-25
SRO SHAREROOT 0.002 $3,138,908.75 -71.4286-60-33.333333.3333
SIS SIMBLE SOLUTIONS 0.08 $8,156,618.50 -50-11.11115.2632
STC SINETECH 0.0025 $1,764,541.00 -82.1429-64.28572525
SKF SKYFII 0.155 $48,385,268.00 19.230819.23083.3333-3.125
SYT SYNTONIC 0.007 $20,874,772.00 -58.8235-56.25-22.22220
TBL TAMBLA 0.011 $10,886,610.00 37.5-15.38461010
TCN TECHNICHE 0.035 $7,585,896.00 -12.5-16.6667-12.5-2.7778
TNE TECHNOLOGY ONE 6.64 $2,045,423,232.00 34.604750.58315.19485.8824
TKF TIKFORCE 0.001 $223,032.72 -94.8718-7500
TTL TRANSCENDENCE TECHNOLOGIES L0.013 $2,432,089.25 -69.5652-36.3636-22.22220
TYM TYMLEZ GROUP 0.195 $24,829,194.00 42.85715.2632
UBN URBANISE.COM 0.038 $25,934,914.00 -11.627940.7407-15.5556-2.5641
VLT VAULT INTELLIGENCE 0.18 $19,554,234.00 -34.4828-245.555618.75
WTC WISETECH GLOBAL 19.665 $5,752,580,096.00 38.40366.67326.35456.177
XRO XERO 43.24 $5,906,845,184.00 41.3551-8.51168.1461-2.6884
XPE XPED 0.003 $4,520,492.50 -57.142902050
XF1 XREF 0.46 $75,249,424.00 -32.0896-11.6505-5.20837.0588
YOJ YOJEE 0.058 $50,846,400.00 -80.339-55.3846-14.70590