Even after the stock market has surged in 2024, there are still plenty of cheap UK shares to capitalise on. And surprisingly, two that have come into my radar this month are both within the tech sector!
Usually, tech stocks carry a significant premium, especially those delivering artificial intelligence (AI) solutions right now. After all, Nvidia’s now trading at a price-to-earnings (P/E) ratio of 67, with rising AI star Applovin sitting at an even richer 88. However, looking at Kainos Group (LSE:KNOS) and Computacenter (LSE:CCC), both stocks are trading significantly lower.
In fact, despite both businesses being perfectly positioned to capitalise on an incoming AI spending boom next year, these tech stocks are trading near their cheapest levels in a decade.
Experts in digitalisation
These businesses are focused on the digitalisation and automation of customer operations. In other words, helping businesses use technology to improve efficiency. As such, they are indeed competitors. However, their approaches are somewhat different, creating space for both companies to win at the same time.
Kainos’s strategy primarily focuses on helping businesses deploy the Workday human capital management platform, as well as upsell their own in-house plugins. On the other hand, Computacenter’s more focused on helping businesses discover what IT solutions they need to complete projects both in terms of hardware and software.
Regardless, Kainos and Computacenter are in a bit of a rut right now. Political uncertainty paired with higher interest rates haven’t exactly been powerful catalysts for growth. And consequently, businesses have largely been putting digitalisation spending along with major projects on hold until economic conditons improve.
Looking at their financial results in 2024 so far, the impact of these headwinds is perfectly clear, with bookings and gross invoiced income taking a hit. So it’s not too surprising to see the Kainos and Computacenter share prices fall by around 20% since January.
A possible opportunity?
As a consequence of falling prices, both stocks are now trading firmly below their historical P/E ratios. Kainos has typically commanded a high premium of 39 times earnings over the last decade on the back of its enormous free cash flow margins. Meanwhile, Computacenter has typically sat closer to 17 times. But today, both companies are trading significantly lower at 20.6 and 14.7 respectively.
That’s why I believe a potential buying opportunity’s emerged. And given that Kainos is now trading at almost half its historical average, it’s an opportunity I’ve already capitalised on. Meanwhile, Computacenter’s impressive track record of hiking dividends makes it a tempting potential addition to my income portfolio.
Of course, no investment is without its risks. Kainos and Computacenter are only cheap if they’re able to bounce back into growth mode. And while lower interest rates paired with political clarity are powerful catalysts, there’s no guarantee that the current sluggish performance will be resolved quickly.
A prolonged recovery could drag these UK shares down even further. And if AI spending doesn’t start delivering results for businesses, the demand for digitalisation could suffer, adding further pressure to these businesses and their valuations.
Nevertheless, their impressive track records make me cautiously optimistic for 2025 and beyond. And if they return to their usual valuation once economic conditions improve, significant share price gains could be unlocked. I feel they’re worth considering.
This post was originally published on Motley Fool
