The technology industry is one of the greatest places to invest when searching for high-growth opportunities. The British stock market has two real gems that I believe could be my next stocks to buy.
Kainos Group
Kainos Group (LSE:KNOS) is one of Britain’s most reputable technology firms. It is essentially a professional services company that helps clients to digitalise their workforce. It also notably helps with Workday solutions and products to assist in implementing these.
Over the past decade, Kainos shares have gained a total of 555% in price. That’s a compound annual growth rate of 23.4%, which is far higher than the FTSE 250‘s compound annual growth rate of 2.5% over the period.
I particularly like that the company is well-diversified across the Western world. While 65% of its revenue comes from the UK, a significant portion also comes from the US and Europe. This will help to protect the company somewhat from any local recessions.
However, I’ve noticed that Kainos is in the business of AI. I’m slightly concerned that while it’s enjoying high growth at the moment, in the future, this could change. Primarily, I think this because it is helping many of its customers implement AI. If the AI becomes more sophisticated, which is likely, there’s a chance these enterprises will need Kainos’ services less.
Softcat
Softcat (LSE:SCT) is one of Britain’s leading IT infrastructure and services providers. It offers software procurement and management, cybersecurity, and consulting and support, among other services.
Over the last decade, Softcat shares have grown around 512% in price. That’s a compound annual growth rate of 23.5%, which is just slightly lower than Kainos and also much higher than the broader FTSE 250.
Softcat derives all of its revenue from the UK, which makes it less geographically diversified than Kainos. However, Softcat has a broader operational scope, offering products and solutions in multiple technology domains.
There are always risks when investing, though. One that is crucial for Softcat to navigate is that it has a high client concentration, especially in the public sector. Changes in government policies, budget cuts, or political changes can affect these revenue streams significantly. That’s why Softcat has been cultivating strategic long-term relationships to secure future revenue based on two-way trust.
I consider technology investing to be wise
Many investment professionals consider the technology sector to be high-risk. Primarily, this is true because companies in this field tend to have much higher valuations. For example, Kainos has a price-to-earnings ratio of 31, and Softcat has a ratio of 30. In comparison, the FTSE 250 has a price-to-earnings ratio of roughly 13.
While this might sound bad on the surface, it needs to be put into context. Successful technology companies can trade at high valuations for long periods of time. That’s because the sentiment of investors around the shares is maintained and can even increase as everybody wants to get in on the action.
In my opinion, as long as I can choose my winners carefully, technology investing can be very successful. I think the field is in for a big growth period in the near future due to AI and robotics. That’s a big reason why both Kainos and Softcat are on my watchlist right now.
This post was originally published on Motley Fool
