1492175481041 - Mike O’Donnell: Which Kiwi tech companies will ‘break on through to the other side’

Mike O’Donnell: Which Kiwi tech companies will ‘break on through to the other side’

OPINION: Exactly 50 years ago The Doors released their debut album.

One listen to The Doors’ The Doors and it was clear that reptilian thunderheads had gathered over the summer of love. If the flower children had been smart enough they would have realised that Jim Morrison’s words of teetering apocalypse, were the beginning of the end and headed for the Takaka hills.

Importantly it wasn’t just Morrison. Ray Manzarek’s strident keyboard anchored The Door’s sound, bookended by John Densmore’s hard grooving percussions and and Robby Kreiger’s fuzzy guitar. Together it made a sound that 50 years later still sounds urgent and edgy. The album starts with Break on through to the other side. This clamorous, blunt, moan of a song encourages listeners to make their own way in life. Hinting of the Door’s naming inspiration (Huxley’s doors of perception), it also suggests a better and clearer world once you have broken through.READ MORE: * Mike O’Donnell: Companies that are good under the hood * Mike O’Donnell: Clearer, simpler support ecosystems required This song came to mind a couple of weeks ago with the news that local technology infant terrible Xero, had broken through one million global subscribers. No artful number this, it was benchmarked as being one million paying users. The real deal.

Founder Rod Drury was clearly stoked. And fair enough too. The poor white boy from Hawkes Bay has failed to take no for an answer for the last 10 years. If you’ve ever been to a Xero shareholders meeting you will know that there are never any metaphorical weeds in Drury’s digital garden, and he’s come in for some criticism as a result (some from the opportunists who failed to sell out when the shares were north of $40 and would like a second chance).

Three years ago Xero told the market that it would gun for growth over profit until it passed the one million customer milestone. Now its passed that milestone, we may see a positive earnings gear change that will affect how the company is valued by the market. A possible outcome will be a lift in share price, which could see the company tracking towards the “tight five” most valuable companies on the NZX.

This decade there’s only ever been one tech company in the top five listed companies in New Zealand and that’s Spark. Yet such a state of affairs belies the fact that technology is now New Zealand’s third biggest export earner, and growing. Compare this to the United States. By the end of 2016 the five largest companies were all tech companies. In order they are Apple, Alphabet (Google), Microsoft, Facebook and Amazon.

There’s a good reason these companies have made their way to the top. They are all digital businesses and all harness disruptive business models with margins sizes reflective of the fact that (mainly) servers run the business.

This means they are all growing faster than non digital stablemates, delivering exponential growth despite their weird operating models. Take Alphabet for instance which operates about 160 businesses, only a handful of which are profitable. But man they are seriously profitable.

I think its inevitable that the New Zealand listed market will have to catch up, with tech companies taking over more seats at the top table. In fact there’s a reasonable argument we have started to already when you look at our comparative performance.

New Zealand Investment Bank Clare Capital recently focused their slide rule on the performance of technology companies on the NZX compared to the Australian stock exchange. While noting its not a completely fair contest they found that New Zealand wins pretty convincingly – both on percentage change and gross value increase.

The 15 New Zealand companies added $603m to their total market cap (or 9.9%) for the 3 months, whereas the 121 Australian companies added $153m to their market cap (or 0.3%).

If Xero continues to deliver then there’s a decent chance that it could join Spark at the top table of five. It’s interesting to ponder who else might join them.

I’m not convinced they will come from the likes of Trade Me, Orion Health, Chorus or Vistra who current inhabit the local listed markets.

They are more likely to come from the up and coming crowd listed on the www.rabble.co.nz website. Companies like Aranz Medical, Vend and Vocus. Companies who can service clients globally, with low cost to acquire then and high ability to retain them.

If the US is anything to go by it might not take that long. In 2011 only Microsoft made the top table, five years later the world had changed with the big five all being tech.

The Doors first album finishes with the fatal The End. In it Morrison assures us change will happen quicker than we think. The same still applies.

Mike “MOD” O’Donnell is a professional director and e-commerce manager. His Twitter handle is @modsta and he’s made the Jack Daniels pilgrimage to Jim Morrison’s grave in Paris. Disclosure of interest – MOD holds Xero, Vend,Orion, Chorus and Trade Me shares and three Doors albums on vinyl.

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