Sector Spotlight: Tech software and services

This is the first part of a series looking at specific sectors. Today, I look at Tech — software and services.

Article updated: 20 May 2020 12:00pm Author: Michael Baxter

For this piece, I focus solely on companies listed in the FT as falling within the main market for Tech — software and services.

During this Covid-19 era, the tech sector stands out from other sectors in a keyway. The Covid-crisis is forcing more companies to adopt digital technologies. Once this crisis has ended, I don’t expect this to reverse.

As a result, some techs might actually benefit from the Covid crisis.

So, here is my take on companies listed on the main market which the FT lists as Tech — software and services.

Computacenter

What it does:

  • Independent provider of IT infrastructure services
  • In more detail this means it “provides user support, supply chain management, and secure provision of applications and data to support individual working styles and improve collaboration.”
  • It operates globally.

Share price story

  • Peak this year 1,920p.
  • Current: 1467.40p.
  • Year low: 935p.
  • February this year saw the highest share price since February 2000.

In a recent update, the company stated: “We now believe that the first half of 2020 will be considerably ahead of the same period of last year.”

Thoughts

Despite sharp falls in the share price, Computacenter still trades at a P/E ratio of 19. On the other hand, this company operates in the very area I expect to see rapid growth. It is well-positioned to benefit from the shift towards digital, but the Covid-19 crisis I believe will accelerate this shift.

The company has performed well during the crisis — which is probably not surprising given the increased emphasis on digital.

Although its valuation seems high, I don’t think the markets have cottoned on to the possibility that we will see an accelerated digital shift.

Micro Focus

What it does:

Micro Focus provides software to help run and secure an enterprise. After a string of controversial purchases, the share price took a severe knock even before the Covid-crisis.

The Micro Focus share price story

  • Peak this year 1,111p.
  • Current: 407.30p.
  • Year low: 311p.
    Autumn 2017 saw the highest share price ever, reaching 2,655p.

Thoughts

Micro Focus should be coming into its own right now, demand for security software is likely to explode. But the company is saddled with large debts — getting through the next year or so will be enormously challenging. If, however, it can survive, (and that is a big if) it could do well post-Covid

NCC Group

What it does:

NCC describes itself as a “global expert in cybersecurity and risk mitigation.” During the Covid-crisis it has offered a free service to the healthcare sector.

The NCC Group share price story

  • Peak this year 232p.
  • Current: 149p.
  • Year low: 134p.
  • Shares peaked at 341p in 2016

Thoughts

Despite sharp falls in the share price its P/E is 33. That may scare many investors off, but for reasons given above concerning the likely accelerating in the need for cybersecurity post-Covid, I don’t understand why shares have fallen so sharply. In theory at least, this company should benefit from this crisis — long-run. Its balance sheet is in good shape, too.

RM

What it does:

RM provides technology solutions for the education sector.

The RM share price story

  • Peak this year 292p.
  • Current: 212p.
  • Year low: 110p.
  • Shares peaked at 857p in 2000. In November 2019 shares hit 310p, the highest level since the first year of this century

Thoughts

When the company released its latest results, it revealed a 1% increase in both sales and net profits. Net debt is at £15million, up £9.2 million over the last year.

Considering its market cap is around £177 million, those debts do not seem onerous to me. I think that RM is another example of a company that could benefit from the Covid-crisis long-run as students and teachers become more used to online learning tools. Given this, the falls in the share price this year seem a little surprising.

Sage

What it does:

Accounts software, especially for smaller companies.

The Sage share price story

  • Peak this year 781p.
  • Current: 631p.
  • Year low: 534p.
  • Shares peaked in the year 2000, although last summer and again earlier this year they moved to within 25% or so of that peak.

Thoughts 

Famous for its accounting and payroll software, Sage’s performance in recent years has been solid, but has not been exceptional. It was slow to adopt the cloud model. I like the company and its profits, but unlike some of the firms I have mentioned, I don’t see any reason why it should especially benefit from the Covid-crisis.

SDL

What it does:

Language Translation & Content Management solutions. Language translation using AI and other technologies is certainly a very exciting area, and SDL is in the vanguard

The SDL price story

  • Peak this year 626p.
  • Current: 471p.
  • Year low: 400p.
  • Shares peaked in 2012 at 740p.

Thoughts

Operating profits increased by 57% in the year to 31 December 2019. I like the company and its products, but it doesn’t fall into the category of the type of company that could benefit from Covid. Then again, I don’t think, post-Covid, the need for its services will diminish.


All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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