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It doesn’t happen often, but the A2 Milk Company Ltd (ASX: A2M) share price was out of form in August.

The infant formula and fresh milk company’s shares fell 12% during the month.

Why did the a2 Milk Company share price tumble lower in August?

There were a couple of catalysts for a2 Milk’s poor form in August. The first was the company’s full year results release.

For the 12 months ended 30 June 2020, a2 Milk Company delivered a 32.8% increase in revenue to NZ$1,730 million. This compares to its revenue guidance range of NZ$1,700 million to NZ$1,750 million.

And due to its earnings before interest, tax, depreciation and amortisation (EBITDA) margin coming in at 31.7%, in line with its guidance range of 31% to 32%, a2 Milk reported a 32.9% increase in EBITDA to NZ$549.7 million in FY 2020.

While this result was undoubtedly strong, it wasn’t quite as strong as some investors were hoping. A2 Milk had been tipped as a company that could smash its guidance in FY 2020 thanks to strong demand for its infant formula during the pandemic.

Thus, a result that was in the middle of its guidance range simply wasn’t enough for investors and sent some to the exits.

In addition to this, the company reported a large increase in its inventory at the end of the period. Its total inventories lifted 36% to NZ$147.3 million. Given that there are concerns that the panic buying from the pandemic may have brought forward sales from future periods, investors appear worried that the company will have excess stock on its hands.

What else weighed on its shares?

In addition to the above, heavy insider selling at the end of August weighed on its shares.

The company’s chairman, chief executive, Asia Pacific chief executive, chief growth and brand officer, and chief operations officer all offloaded large amounts of shares.

For example, the Asia Pacific chief executive, Peter Nathan, sold almost NZ$15.1 million worth of shares.

Given how insider selling is often seen as a bearish indicator (who sells shares if they are confident they are going higher?), I’m not surprised that investor sentiment is low right now.

Is this a buying opportunity?

I remain a fan of a2 Milk Company but I am a touch more cautious on things following the insider selling.

In light of this, I would class its shares as a buy, but suggest investors buy half of a desired holding now and wait until its AGM in November for the other half.

More reading

• 2 ASX dividend shares with yields over 10%
• This ASX-listed company makes $5.7 million per employee
• A2 Milk share price lower after Chairman, CEO, COO, and other execs sell millions of shares
• Why a2 Milk, Appen, Huon, & Newcrest shares are tumbling lower
• These ASX ETFs will give you exposure to China’s growing middle class

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post The a2 Milk share price sank 12% lower in August: Should you buy the dip? appeared first on Motley Fool Australia.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Even in the wake of record-setting growth, it appears the best may be yet to come for Netflix (NASDAQ: NFLX). As the result of widespread stay-at-home orders, the company has attracted 25.86 million new paying customers during the first six months of this year. This brought the company’s total subscribers to 193 million, but that number could be dwarfed by what’s yet to come.

Shares of the streaming giant got a boost today as the result of a bullish analyst note that posited that Netflix’s subscriber numbers could more than double over the coming decade, climbing to between 475 million and 525 million by 2030. 

RBC Capital analyst Mark Mahaney updated his price target on Netflix to $610 per share, while reaffirming his outperform (buy) rating. The analyst estimates that Netflix is a staple in 66% of U.S. households, but its international penetration rate sits at just 29%. Mahaney expects that to change over the next 10 years, with the streaming service eventually making its way into 57% of global fixed broadband households, nearly double the current rate.

Mahaney believes that Netflix “has achieved a level of sustainable scale, growth, and profitability that isn’t currently reflected in its stock price,” he wrote. “We also view Netflix as one of the best derivatives off the strong growth in online video viewing and in internet-connected devices.”

That’s not all. Mahaney also estimates that Netflix’s pricing power will enable the company to generate average revenue per user (ARPU) of between $16 and $22, as much as double the current amount of $10.80. 

The analyst became increasingly bullish in the wake of user surveys conducted in several countries. Customer satisfaction hit record highs in the U.K. and India, at 81% and 92% of users, respectively, who said they were “extremely” or “very satisfied” with Netflix.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Netflix stock hits all-time highs as subscribers plan to stay post-pandemic
• Want to own the FAANG stocks? Here are 3 ways you can
• Better Buy: Netflix vs. Amazon

Danny Vena owns shares of Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Netflix. The Motley Fool Australia has recommended Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Can Netflix more than double subscribers by 2030? appeared first on Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Paypal Holdings Inc (NASDAQ: PYPL) yesterday announced its expansion into the buy now, pay later (BNPL) sector, sending investors scurrying in all directions. The payments giant entered the $5 trillion United States retail market with its new offering ‘Pay in 4’. The service is an expansion on PayPal’s existing pay later solutions, which include PayPal Credit’s revolving credit line and Easy Payments.

Doug Bland, SVP of Global Credit at PayPal spruiked the company’s offering saying “With Pay in 4, we’re building on our history as the originator in the buy now, pay later space, coupled with PayPal’s trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice.”

The competitive difference here is that merchants will not have to pay any additional fees. The service will be included as part of PayPal’s current pricing. In addition, it won’t be promoting other merchants to its customers, unlike the other BNPL companies. Nonetheless, the question remains; will Paypal just scoop up the lion’s share of the market, or are the ASX BNPL shares well placed to compete?

What happened to BNPL shares yesterday?

Yesterday marked one of the largest falls in the short history of the BNPL sector. The Sezzle Inc (ASX: SZL) share price fell the most, ending the day down by 14.7%. Furthermore, Zip Co Ltd (ASX: Z1P) fell by 12.77%, OpenPay Group Ltd (ASX: OPY) by 7.18%, Splitit Ltd (ASX: SPT) by 7.26%, and market leader Afterpay Ltd (ASX: APT) was down by 8.04%.

Yesterday’s falls underline the bubble-like nature of the sector, and the almost gambling approach of many buy now, pay later investors. The rapid growth of Afterpay competitors also underlines just how low the barriers to entry in this sector are. What’s more, there are no reasons for shoppers to favour any one of these services. At the end of the day, they are just payment instalment services. In addition, private companies like Limepay are already working to help organisations offer instalment services without the BNPL providers. Finally, it underscores the stratospheric and unsustainable market valuation of Afterpay.

Is PayPal really a threat?

In my opinion, PayPal is definitely a threat. It is the largest payment method for the United States and the United Kingdom. In fact, the company boasts an 82% better conversion rate using PayPal, and it already has 237 million shoppers globally.

PayPal won’t be the last shark in the waters. In fact, it isn’t even the first. Commonwealth Bank of Australia (ASX: CBA) has already entered the BNPL market locally. In January, the bank announced it would be premiering its new partnership with Swedish private bank, Klarna. CommBank has a 5% stake in Klarna, and 50% ownership in the Australian and New Zealand business. 

This is no idle threat, CommBank is far and away the nation’s largest digital payments processor. However, for those who thought the bank would just sweep in and take most of the market; it hasn’t happened. Moreover, the US market is gigantic. It remains to be seen whether PayPal can easily take out the majority of the US market.

The counter narrative

Personally, I favour the counter narrative. All of the big players have been caught flat footed by the rapid onset of the BNPL market and they are desperately trying to play catch up. Sure, PayPal is a threat. But this sector is already filled with threats. Moreover, PayPal has pre-existing pay later mechanisms which don’t seem to have set the world on fire.

The strongest argument for me, is that most of the serious players already have deals with large digital payment points. For example, Afterpay has a deal with Apple Inc (NASDAQ: AAPL)’s Apple Pay and Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG)’s Google Pay. Zip Co is on Amazon.com Inc (NASDAQ: AMZN) and has a new deal for business lines of credit with eBay. Lastly, Splitit has deals with Visa and MasterCard, enabling its point of sale service with merchants globally. 

Another competitive advantage that the BNPL shares have are their portals. Each of the ASX BNPL companies offers a digital shopping mall with dozens of online stores to explore. Not only are they helpful for customers, they actually drive business to merchants. The fee is for more than just processing payments and increasing over the counter sales.

Foolish takeaway

I believe the sell off in BNPL shares on Tuesday was preemptive. The ASX BNPL shares have positioned themselves well through partnerships, differentiated service offerings, and the digital ecosystem each one has built. Not only that, but the global market is very large, with companies like Sezzle already deeply embedded in the US.

In the final analysis, I think the market is large enough to support several BNPL companies. I also think several of the local companies are well placed to establish a defensible beach head. Yesterday’s sell off has created several buying opportunities. In my view, both Sezzle and Zip Co are very interesting at their current prices.

More reading

• ASX 200 falls 1.8%, Afterpay drops 8%
• Zip and Brainchip were among the most traded shares on the ASX last week
• These ASX stocks at earnings risks as the Aussie is forecast to hit US80 cents
• ASX 200 down 1.7%: Afterpay sinks on PayPal news, QBE sacks its CEO, bank shares lower
• Why Afterpay, Flight Centre, Helloworld, & QBE shares are tumbling lower

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and PayPal Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc and recommends the following options: short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, PayPal Holdings, and Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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With the base interest rates on savings accounts as low as 0.05%, it is almost impossible to generate a sufficient income from them.

But don’t worry, because there are a number of quality dividend shares on offer on the Australian share market to save the day.

Two that I would buy are listed below:

Dicker Data Ltd (ASX: DDR)

The first ASX dividend share to consider buying is Dicker Data. I think the leading wholesale distributor of computer hardware and software across the ANZ region is a great option. This is due to its strong market position, growing vendor agreements, positive tailwinds, and new distribution centre. The latter gives the company significant room to expand its operations and boost its revenue growth once complete. 

Another positive is the way the company has been able to continue its growth during the pandemic. At a time when many companies are struggling, Dicker Data recently reported half year profit before tax growth of 30.4% to $42 million. This puts it on course to deliver on its target of lifting its dividend by 31% to 35.5 cents per share this year. Based on the current Dicker Data share price, this represents a generous fully franked 4.75% dividend yield. It is also worth noting that an insider has been buying shares this week. The company’s COO, Vladimir Mitnovetski, picked up $37,500 worth of shares on Monday. Judging by this purchase, he sees value in its shares at this level.

Rural Funds Group (ASX: RFF)

Another ASX dividend share I would buy is Rural Funds. This agriculture-focused property group has been growing its distribution consistently each year for some time. Pleasingly, it looks well-positioned to continue doing so for the foreseeable future. This is thanks to its high quality portfolio of assets that have long term tenancy agreements and built in rental increases.

At the last count the company’s weighted average lease expiry was almost 11 years. I believe this gives it great visibility on its future earnings and means its distribution growth looks very secure. In FY 2021 management is intending to grow its distribution by 4% to 11.28 cents per share. Based on the latest Rural Funds share price, this equates to a 5.2% yield.

More reading

• Buy these ASX dividend shares if the RBA cuts rates
• Beat low interest rates with Coles and this ASX dividend share
• Are ASX banks or miners buys for dividends?
• This ASX-listed company makes $5.7 million per employee
• Will the RBA keep the cash rate on hold for 3 more years?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and RURALFUNDS STAPLED. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Australian share market has been out of form for the last few days and has pulled back from recent highs.

While this is a touch disappointing, spare a thought for shareholders of the three ASX shares listed below.

These shares have just fallen to 52-week lows or worse. Is this a buying opportunity?

Insurance Australia Group Ltd (ASX: IAG)

The Insurance Australia share price dropped to a multi-year low of $4.68 on Tuesday. The insurance giant’s shares have been sold off in recent months due to the impact of the pandemic on its business. For the 12 months ended 30 June 2020, IAG reported a 5.2% increase in revenue to $18,576 million but a 49.6% decline in net profit from continuing operations to $439 million. Management advised that a material narrowing in its insurance margins was responsible for the profit slump. In light of this poor form, no final dividend will be paid to shareholders. I’m not convinced that the worst is over for the company, so won’t be in a rush to invest.

Orora Ltd (ASX: ORA)

The Orora share price was out of form and dropped to a multi-year low of $2.20 yesterday. Investors have been selling the packaging company’s shares following a poor FY 2020 result and its weak outlook. In FY 2020 the company posted a 22.8% decline in net profit after tax to $127.7 million. Looking ahead, management warned that it expects challenging and uncertain market conditions to persist for the foreseeable future. In light of this, I would stay clear of Orora until conditions improve.

Telstra Corporation Ltd (ASX: TLS)

The Telstra share price tumbled to a 52-week low of $2.83 on Tuesday. Investors have been selling the telco giant’s shares amid concerns that it won’t be able to sustain its 16 cents per share dividend in FY 2021. This follows the release of its guidance in August which revealed a greater than expected impact from the pandemic. I’m optimistic a change in dividend policy will allow for this dividend to be maintained. As a result, I think the Telstra share price weakness is a buying opportunity.

More reading

• The Telstra share price just hit a 52-week low: Is it time to buy?
• Here’s why the Telstra share price fell 15% in August
• Zip and Brainchip were among the most traded shares on the ASX last week
• Why I’d buy Wesfarmers and 1 other quality ASX dividend right now
• Telstra and 1 more hot ASX dividend share to buy

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Should you buy Telstra and these beaten down ASX shares? appeared first on Motley Fool Australia.

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On Tuesday the S&P/ASX 200 Index (ASX: XJO) continued its disappointing run and tumbled notably lower. The benchmark index fell 1.8% to 5,953.4 points.

Will the market be able to bounce back from this on Wednesday? Here are five things to watch:

ASX 200 to rebound.

The ASX 200 looks set to end its losing streak on Wednesday. According to the latest SPI futures, the benchmark index is expected to rise 28 points 0.5% higher at the open. This follows a positive night of trade on Wall Street which saw the Dow Jones rise 0.75%, the S&P 500 climb 0.75%, and the Nasdaq storm 1.4% higher.

Tech shares on watch.

The Australian tech sector was out of form on Tuesday and weighed heavily on the ASX 200. Pleasingly, it looks set to be a better day of trade for the likes of Altium Limited (ASX: ALU) and Appen Ltd (ASX: APX) on Wednesday after their US counterparts stormed higher. The local tech sector has a tendency to follow the lead of the tech-heavy Nasdaq index, which rose by a sizeable 1.4% overnight.

Oil prices charge higher.

Energy producers including Beach Energy Ltd (ASX: BPT) and Santos Ltd (ASX: STO) could be on the rise today after oil prices charged higher overnight. According to Bloomberg, the WTI crude oil price is up 0.8% to US$42.96 a barrel and the Brent crude oil price has jumped 1.1% to US$45.78 a barrel. Improving economic data drove oil prices higher.

Gold price edges lower.

The shares of Evolution Mining Ltd (ASX: EVN) and Resolute Mining Limited (ASX: RSG) will be on watch today after the spot gold price edged lower. According to CNBC, the spot gold price fell 0.1% to US$1,976.50 an ounce. Robust US economic data weighed on the precious metal.

Shares trading ex-dividend.

Another group of shares will be going ex-dividend this morning and could trade lower. These include packaging company Amcor PLC (ASX: AMC), fintech Iress Ltd (ASX: IRE), health insurance giant Medibank Private Ltd (ASX: MPL), and wine company Treasury Wine Estates Ltd (ASX: TWE).

More reading

• A strange thing is happening with index funds…
• ASX 200 falls 1.8%, Afterpay drops 8%
• The Cleanaway share price soared 22% in August. Time to buy?
• 3 ASX blue-chip shares I would buy at today’s prices
• Why it makes sense to invest in ASX tech shares

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia owns shares of and has recommended Amcor Limited and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended IRESS Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The IDP Education Ltd (ASX: IEL) share price was one of the best performers on the S&P/ASX 200 Index (ASX: XJO) in August.

The student placement and language testing company’s shares recorded a stunning 50% gain over the month.

Why did IDP Education rocket higher in August?

Investors were fighting to buy IDP Education shares in August after the release of a surprisingly strong full year result.

Although the company was hit hard by the pandemic, it was still able to deliver strong profit growth.

For the 12 months ended 30 June 2020, IDP Education reported a 2% decline in revenue to $587.1 million but an impressive 29% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $148.6 million.

This profit growth was driven by a material reduction in both direct and overhead costs. Management revealed that direct costs fell 8% to $241.9 million and overhead costs were reduced by 10% to $196.2 million.

The company’s CEO, Andrew Barkla, commented: “Our results reflect strong momentum in the first of the half year, followed by a pivot towards disciplined capital management and product innovation in the second half.”

What were the drivers of its results?

Thanks to a strong performance from the multi-destination side of the company’s Student Placement business, this key business reported a 12% increase in revenue to $190.6 million.

This was supported by its English Language Teaching and Digital Marketing & Events businesses. They both grew revenue by 4% year on year.

However, the company’s biggest segment was out of form and offset these gains. IDP Education’s English Language Testing business reported a 9% decline in revenue to $325.5 million in FY 2020.

Is it too late to invest?

While it isn’t the bargain buy that it was a few months ago, I still believe IDP Education would be a great long term option for investors.

Especially given its strong balance sheet, growing footprint, strong online offering, and favourable tailwinds.

Another positive is that management notes that student intentions are strong. Its research is showing that only 7% of students no longer intend to commence study as planned. This could mean demand for its services grows strongly once trading conditions return to normal.

More reading

• These were the best performing ASX 200 shares in August
• How to become rich by investing $1,000 into ASX shares
• These ASX shares were top performers last week
• ASX 200 Weekly Wrap: Blue chips, earnings drag ASX lower
• These were the best performing ASX 200 shares last week

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Idp Education Pty Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I think September is a great time to buy ASX dividend shares.

We’ve just seen most of the results in the August 2020 reporting season. So we now have good idea about how businesses performed through the tough COVID-19 period.

Businesses that can grow (or maintain) the dividend during these times are truly great ASX dividend shares. But they also need to be at a good price to buy them today.

That’s why I’m personally interested in these two ASX dividend shares in September:

Future Generation Investment Company Ltd (ASX: FGX)

Future Generation is a listed investment company (LIC). I think it’s a special LIC because it doesn’t have any management fee costs and instead it donates 1% of its net assets to youth charities each year.

What does it invest in? Future Generation invests into the funds of other fund managers which buy ASX shares. Those fund managers work for free to enable the donations to be paid.

The useful thing about LICs is that they can generate investment returns and then pay out those profits as a steady (and growing) dividend.

Looking at Future Generation’s gross portfolio performance over the past five years, it has outperformed the S&P/ASX All Ordinaries Accumulation Index by 2% per annum.

It has increased its dividend every year since 2015 when it first started paying a dividend. It hasn’t been fast growth, but the steady income growth has been attractive.

At the current Future Generation share price the ASX dividend share has a grossed-up yield of 6.9%. Aside from the nice yield, I also like Future Generation because it’s trading at a 8.3% discount to the net tangible assets (NTA) at July 2020. Buying a LIC at a discount with long-term outperformance is attractive to me.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

I think that Soul Patts is the gold standard for dividends on the ASX. I believe that every Aussie income investor should have Soul Patts in their portfolio.

It’s the only business on the ASX to have increased its dividend every year over the past two decades.

How has it managed that? Well, it’s an investment conglomerate with a diverse portfolio with largely defensive businesses. Its holdings like TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW) and New Hope Corporation Limited (ASX: NHC) send dividends to Soul Patts which it can then pay to shareholders, whilst retaining a portion for investing in new opportunities.

The ASX dividend share’s annual cashflow benefits compounding from both the retained net cashflow it invests into new businesses as well as its existing holdings growing their dividends.

Soul Patts has paid a dividend every single year since it listed in 1903. That means dividends have continued to flow to shareholders through world wars, the Spanish Flu, the 1930s depression and so on.

I like that Soul Patts tries to identify investment opportunities that can keep growing profit whether times are good or bad. For example, I think swimming schools – one of Soul Patts’ private investments – would be a reliable business even during a non-pandemic recession because parents would still want their children to learn how to swim.

Over time, I think Soul Patts can grow its dividend for many years into the future because it makes long-term investments itself. The ASX dividend share can steadily shift its portfolio to new opportunities as they arise. It will seemingly soon be invested in regional data centres, which is a great long-term growth area.

At the current Soul Patts share price it offers a grossed-up dividend yield of 4.15%.

Foolish takeaway

I really like both of these ASX dividend shares, that’s why I own them in my portfolio. They offer solid starting dividends yields, they have a history of dividend growth and have good portfolio diversification. Future Generation is probably better for people who want a higher starting yield, but I’d rather buy Soul Patts for its long-term growth record and steady capital growth.

More reading

• Beat low interest rates with these ASX dividend shares
• Are ASX banks or miners buys for dividends?
• This is the ASX share I’d buy this week
• Where I’d invest $10,000 right now in ASX shares
• 5 top ASX dividend shares you should never sell

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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A strange thing is happening in share markets right around the world. Normally, the performance of an individual share market is measured using an index. An index works by taking a basket of the largest companies listed on an exchange and giving each a weighting based on their market capitalisation.

For example, the most popular index in Australia is the S&P/ASX 200 Index (ASX: XJO). The ASX 200 takes the top 200 companies listed on the ASX and weights them according to their market cap. Right now, the largest share in the ASX 200 is CSL Limited (ASX: CSL), which makes up 7.83% of the entire index. Thus, an ASX 200 index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) will hold ~7.3% of its funds in CSL shares.

Index funds like IOZ have become very popular with investors over the past decade precisely because of the diversification that they can bring with one easy share. This largely holds true with ASX index funds. Currently, the next four shares after CSL in the ASX 200 are Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB). These four companies add another 7.28%, 6.62%, 3.77% and 3.41% respectively to the ASX 200’s total weighting, on top of CSL’s 7.83%. In other words, the top five ASX companies command a 28.91% share of the entire ASX 200 right now.

But an interesting thing is happening in other markets and their indices around the world.

Index concentration

Let’s take the flagship S&P 500 Index from the United States. The S&P 500 is the closest equivalent the ASX 200 has over in America, but rather than 200 companies, it holds… you guessed it, 500.

Now, you would think that an index with 500 companies would be a little less concentrated than our ASX 200. So let’s have a look.

Right now, the largest company on the S&P 500 is Apple Inc (NASDAQ: AAPL), with a weighting of 6.98%. Next up is Microsoft Corporation (NASDAQ: MSFT) with 5.96%, then Amazon.com, Inc (NASDAQ: AMZN) at 4.89%. Following that, we have Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) at 3.34% and rounding out we have Facebook Inc (NASDAQ: FB) at 2.42%. So collectively, the S&P 500 has 23.59% of its entire index in just five companies.

That might look like less than our own ASX, but we only have 200 companies in the ASX 200 compared to the 500 in the S&P 500. Let’s switch some numbers around to demonstrate. On the ASX 200, 2.5% of the companies control 28.91% of the index, whereas on the US markets 1% of the companies controls a 23.59% weighting.

It gets even better if we look to another market: China. According to reporting in the Australian Financial Review, just three companies — Alibaba Group, Tencent Holdings and Meituan Dianping — make up more than 38% of the MSCI China Index, which has more than 600 holdings.

Alibaba and Tencent are both tech giants, while Meituan Dianping specialises in food delivery.

What does this mean for investors in index funds?

This uber-concentration of indices around the world is worrying in my view. It means that the fortunes of anyone who is investing in index funds for supposed ‘diversification’ is really relying on a handful of big tech companies (or in Australia’s case, mining and banking companies). So if you invest in index funds for this purpose, you might want to take a look at what you’re really holding in your portfolio. You might not be as happily diversified as you think.

More reading

• ASX 200 falls 1.8%, Afterpay drops 8%
• The Cleanaway share price soared 22% in August. Time to buy?
• Apple and Tesla are in the top 5 US shares bought by ASX investors this week
• 3 ASX blue-chip shares I would buy at today’s prices
• What you need to know about the RBA’s rate decision today

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Alphabet (A shares), Facebook, and National Australia Bank Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Are you looking for some exposure to the small side of the market? If you are, then the three ASX small cap shares listed below could be worth a closer look.

Here’s why I think they have bright future ahead of them:

Bigtincan Holdings Ltd (ASX: BTH)

Bigtincan is a $450 million provider of sales enablement software. This clever software provides businesses with the information, content, and tools that help sales teams sell more effectively. The company has experienced very strong demand for its platform in recent years from a number of major companies. These are spread across over 50 countries and a diverse range of industries and sectors. In FY 2020 the company delivered a 53% increase in annualised recurring revenue (ARR) to $35.8 million. Pleasingly, it expects more of the same this year. Management is forecasting 36.9% to 48% year on year ARR growth.

ELMO Software Ltd (ASX: ELO)

ELMO is a $490 million cloud-based human resources and payroll software company. It provides a unified software platform which allows businesses to streamline a range of processes. I like the company due to its massive opportunity in the ANZ market and its option to expand internationally in the future. This is thanks to its jurisdiction agnostic platform. Another positive is that ELMO undertook a capital raising this year to fuel its future growth. Management intends to use these funds to acquire complementary businesses. But even without these acquisitions, ELMO is forecasting further strong organic growth in FY 2020. It has provided guidance for ARR of $65 million to $70 million, which represents year on year growth of 18% to 27%.

Mach7 Technologies Ltd (ASX: M7T)

A final small cap to watch is Mach7. It is a $265 million medical imaging data management solutions provider. Mach7 offers software that creates a clear and complete view of the patient. This helps users with diagnoses, reduces care delivery delays and costs, and improves patient outcomes. Management estimates that its total addressable market is worth approximately US$2.75 billion per annum. This compares to the revenue of $18.9 million it posted in FY 2020, which was more than double year on year. I feel this gives it a long runway for growth over the next decade.

More reading

• Top ASX Stock Picks for September 2020
• 4 fantastic ASX growth shares to buy in September
• Mach7 Technologies share price is up 5% on first full year profit result
• Why Bigtincan, Cleanaway, Worley, & Zip Co shares are storming higher
• Bigtincan share price storms higher on strong FY 2020 result and guidance

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software and MACH7 FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends BIGTINCAN FPO. The Motley Fool Australia owns shares of and has recommended BIGTINCAN FPO. The Motley Fool Australia has recommended Elmo Software and MACH7 FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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