1. UK Technology Sector Landscape

Technology plays a pivotal role in the growth of any economy. The technology sector has emerged as a defensive sector since the remote working environment amid the Covid-19 pandemic encouraged the requirement of cloud computing, artificial intelligence, technology tools to abstain from cyber-attacks, internet-of-things, among others. Most of the companies are undergoing technological advancement and digital transformation worldwide after the emergence of the Covid-19 pandemic.

Meanwhile, according to the report from Grand View Research, the market size for the global digital transformation industry is projected to expand at a CAGR of 22.5% from 2020 to 2027. The industry was worth around USD 284.38 billion during 2019. Nonetheless, the digital transformation holds the potential to streamline and integrate business operations and achieve operational excellence. However, one of the major challenge companies faces while going digital transformation is the lack of budget allocation and planning. With reference to the report from Tech Nation, the UK Technology industry increased to 10.1 billion pounds in 2019. Moreover, the number of technology companies soared, driven by a 44% increase in venture capital investment during 2019. Overall, the U.S. and Asian investors represented almost 50% of total venture capital investment made in 2019.

Key Trends in the Technology Sector

• Artificial Intelligence – Rising demand for online gaming, remote working environment, and electric vehicles have increased the artificial intelligence usage. In fact, AI is projected to boost the UK economy by £232 billion by 2030.
• Virtual Reality - The advent of 5G, falling hardware costs, and advancement in robotics would enable a major shift in the industry. Moreover, Virtual, and augmented reality technologies are transforming the digital entertainment market.

Risk Exposures to the Technology Sector

• Economic Downturn – The macro-economic uncertainties has impacted the demand in commercial space as the dented consumer confidence has subdued the demand for smartwatch and tablet markets.
• Supply Chain Disruption – The Covid-19 pandemic and US-China spat has also impacted the availability and cost of raw materials, including smart chips. Moreover, the fluctuating exchange rates are impacting the cost of imports for UK ICT companies. Further, Brexit and other uncertainties has affected the inventory patterns, which can result in lower margins and profitability.

Benchmark Index Performance

Based on the last ten years performance, the FTSE All-Share Technology index has outperformed the FTSE 100, FTSE 250, and FTSE AIM UK 50 index. The FTSE All-Share Technology index generated a return of about 186.05%; however, the FTSE 100 generated a return of around 65.77%, FTSE 250 generated a return of around 84.05% and FTSE AIM UK 50 index produced a return of approximately 85.71%.

Figure 1: Ten Years Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Technology Sector Outlook

With reference to the report from Markets and Markets, the global IT Operations Analytics (ITOA) market size is expected to grow at a CAGR of 37.2% from USD 9.3 billion in 2020 to USD 45.1 billion by 2025, % during the forecast period. The proliferation of a huge amount of IT operations data and increasing focus on the adoption of cloud based ITOA solutions is also expected to drive the market growth. However, frequent changes in IT operations and limited investments by the organization to upgrade the prevailing IT system is some of the factors hindering the market growth. Moreover, technology organizations would consider three key strategic opportunities like redoubling digital transformation efforts, reorienting & reskilling the workforce, and reexamining where & how manufacturing happens. Overall, the UK technology industry would remain one of the fastest-growing sectors with high levels of investment, job creation and ample entrepreneurship opportunities.

2. Investment analysis and stocks under discussion (AVST, KWS, IOM, CPI)

After gaining insights into the technology sector, we would look at the business model of four technology players listed on the London Stock Exchange. 

A. Avast PLC (LON: AVST)

(Recommendation: Buy, Potential Upside: 23.66%, Market Capitalization: GBP 4.71 billion)

Avast PLC is an FTSE 100 listed Company, which offers digital security and privacy products and serves over 435 million users online. It offers products and services under the AVG and Avast brands that safeguard users against cyber-attacks and evolving Internet of Things (IoT) threat landscape.

                                                                                                                                                                                    

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 23.66% over the closing price of GBX 452.40 (as of 30 March 2021).

B. Keywords Studios PLC (LON: KWS)

(Recommendation: Speculative Buy, Potential Upside: 14.79%, Market Capitalization: GBP 1.90 billion)

Keywords Studios PLC (LON: KWS) is an FTSE AIM UK 50 Index listed Company. The Company is engaged in the business of providing creative and technical services platform for the video games industry. The Company was established in 1998 with over 65 facilities in over 21 countries.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.79% over the closing price of GBX 2,590.00 (as on 30 March 2021).

C. Iomart Group PLC (LON: IOM)

(Recommendation: Speculative Buy, Potential Upside: 18.69%, Market Capitalization: GBP 347.98 million)

Iomart Group PLC (LON: IOM) is a Scotland based company that provides secure and managed services that include designing, delivering, and managing technology and cloud solutions. It is a constituent of FTSE AIM UK 50 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 18.69% over the closing price of GBX 317.50 (as on 30 March 2021).

D. Capita PLC (LON: CPI)

(Recommendation: Hold, Potential Upside: 15.89%, Market Capitalization: GBP 683.95 million)

Capita PLC (LON: CPI) is a technology Company, which provides support services to clients in the public and private sectors. The Company is a constituent of the FTSE 250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.89% over the closing price of GBX 42.04 (as on 30 March 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy” and “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 31 March 2021.

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