1. UK Technology Industry Landscape

The Technology sector encapsulates a list of companies that generates revenue from technological growth, development, and manufacturing. The technology sector can be classified into several sub-sectors such as Software & services, Hardware & equipment, and Semiconductors & semiconductor equipment. Moreover, the sector is highly concentrated as it is dominated by fewer companies.

With reference to the data from the Government officials, there was a large amount of money flowing into the UK technology industry. The inflow witnessed a significant year-on-year growth of around 230% to £29.4 billion during 2021, while it was around £11.5 billion in the prior year. A significant portion of investments came from the US, with almost 37% of all funding coming from the United States, up from 31.5% in 2020, with the large chunk going into fintech and health tech companies. Meanwhile, UK tech investment represented one-third of the total £89.5 billion that flowed into the European tech ecosystem in 2021.

Some of the most prominent unicorns created this year includes the e-commerce platform Depop, car selling platform Motorway, insurance disrupter Marshmallow, and the challenger bank Starling Bank.

Key Trends in the Technology Sector

Risk Exposures to the Technology Sector

• Shortage of Semiconductors: The global chip shortage had triggered massive disruptions around the globe as companies failed to meet rising demand levels.
• Digital business interruption: The failure of systems and technology may cause a headwind in the digital business. It may happen because of a cyber-attack, software or design error, or other technology issue.
• Omicron Variant: The rising Omicron cases in the UK may result in an increase in the restrictions. Thus, it may hamper the growth potential of the industry.
• UK Services PMI: The UK Services PMI fell sharply to 53.2 in December 2021 from 58.5 in November 2021

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Software & Computer Services index has outperformed the FTSE 100 and FTSE 250 index. The FTSE All-Share Software & Computer Services index generated a return of about 24.18%; however, the FTSE 100 index produced a return of around 13.73%, and the FTSE 250 index generated a return of approximately 15.89%

Figure 1: One Year Benchmark Index Performance

(Data Source: Refinitiv, Analysis by Kalkine Group)

Technology Sector Outlook

The UK technology industry had shown resilience boosted by the rising investment deals and accelerated job creations even after facing several operational headwinds presented by the Covid-19 pandemic during 2021. Moreover, the UK Government had raised R&D investments to £20 billion by 2024-25 to support the UK’s research institutions, universities, and businesses with an aim to increase this to £22 billion by 2026-27. Furthermore, 37 tech and consumer internet companies which got listed on the LSE achieved a combined market cap of £31 billion. The London Stock Exchange also supported 30 founder-led companies to list this year.

Looking Ahead, the UK technology industry would focus on bringing innovation in several sub-sectors such as software, semiconductors, AI, FinTech and IoT. 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 (WISE, NETW, SGE)

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

A. Wise PLC (LON: WISE)

(Recommendation: Buy, Potential Upside: 20.22%, Market Capitalization: GBP 7.46 billion)

Wise PLC (LON: WISE) is a global technology services provider. It offers payment network and money transfer services. It processes over £5 billion cross-border transactions every month.

Share Price Chart (since 07 July 2021)     

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the MACD line remained above the signal line, indicating an oversold scenario.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.22% over the closing price of GBX 736.00 (as of 21 December 2021).

B. Network International Holdings PLC (LON: NETW)

(Recommendation: Speculative Buy, Potential Upside: 11.39%, Market Capitalization: GBP 1.49 billion)

Network International Holdings PLC (LON: NETW) is an FTSE 250 Index listed leading provider of digital commerce across the middle east and Africa region.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                 

From a technical standpoint, the stock is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the MACD line remained above the signal line, indicating an oversold scenario.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 11.39% over the closing price of GBX 277.80 (as on 21 December 2021).

C. Sage Group PLC (LON: SGE)

(Recommendation: Expensive, Potential Downside: 13.85%, Market Capitalization: GBP 8.43 billion)

Sage Group PLC (LON: SGE) is an FTSE 100-listed provider of business software and solution in North America, North Europe, Central Europe, Africa, the Middle East, Asia, and Latin America.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering between the middle Bollinger band and the upper Bollinger band, reflecting a bearish price momentum.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 13.85% over the closing price of GBX 815.20 (as on 21 December 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 22 December 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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