1. UK Technology Industry Landscape

The Technology sector encapsulates a list of companies engaged in the manufacturing of semiconductors, creation of software, computers, or products & services relating to information technology. 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. The Technology sector had witnessed a boom as most of the companies are undergoing digital transformation worldwide post emergence of the Covid-19 pandemic. Furthermore, the UK’s technology sector had boosted the growth of other industries as well such as digital, healthcare, transport, creative, entertainment, financial services, cybersecurity, agriculture, and communications.

According to the figures from the leading industry expert, the UK’s technology sector had demonstrated an increase of more than 1000% in both venture capital investment and the number of billion-dollar “unicorn” companies over the past decade. Moreover, the investments grew from around £1.2 billion to £11.3 billion between 2010 and 2020. The number of technology-related unicorns had witnessed a significant rise from 8 in 2010 to 81 by 2020.

Over the last decade, the AI (“Artificial Intelligence”) sector had witnessed an overwhelming growth of approximately 145%, and London is considered as an AI capital of Europe. London encapsulated more than double AI related companies as compared to other major European nations such as Berlin and Paris. In a nutshell, UK has the third-largest digital technology sector in the world. 

Key Trends in the Technology Sector

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 have affected the inventory patterns, which can result in lower margins and profitability.
• Cyber Crimes: The increasing number of cyber-attacks across several industries had posed serious threats, and the technology industry had tried to combat these attacks.
• Workforce Shortage: The shortage looming for the information security workforce would lead to the other emerging risks in the sector.

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All Technology index has outperformed the FTSE 100 and FTSE 250. The FTSE All Technology index generated a return of about 95.42%; however, the FTSE 100 generated a return of around 15.36% and FTSE 250 generated a return of around 31.88%

Figure 1: One Year Benchmark Index Performance

(Source: Refinitiv; Analysis done 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 2020. Moreover, the digital boom experienced in 2020 had opened doors for several jobs across the entire UK. Furthermore, the UK consists of 136 potential unicorns having a value ranging from USD 250 million to USD 800 million. Looking Ahead, the UK technology industry would focus on bringing innovation in several sub-sectors such as software, semiconductors, AI, FinTech and IoT. 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 (KWS, BYIT, CCC)

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. Keywords Studios PLC (LON: KWS)

(Recommendation: Speculative Buy, Potential Upside: 24.46%, Market Capitalization: GBP 1.96 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.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 24.46% over the closing price of GBX 2,590.00 (as of 13 July 2021). The next important support level on the technical chart is at GBX 2,326.00.

B. Bytes Technology Group PLC (LON: BYIT)

(Recommendation: Speculative Buy, Potential Upside: 30.70%, Market Capitalization: GBP 1.07 billion)

Bytes Technology Group PLC (LON: BYIT) is an FTSE 250-listed UK-based company engaged in the offering of software, hardware, and cloud services.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 30.70% over the closing price of GBX 446.60 (as on 13 July 2021). The next important support level on the technical chart is at GBX 384.00.

C. Computacenter PLC (LON: CCC)

(Recommendation: Expensive, Potential Downside: 16.31%, Market Capitalization: GBP 3.30 billion)

Computacenter PLC is an FTSE 250 index listed leading provider of the IT infrastructure services.

CCC had paid a final dividend of 38.40 pence per share on 02 July 2021, while the ex-dividend date was 03 June 2021.

On 9 September 2021, CCC will release the interim results.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 16.31% over the closing price of GBX 2,688.00 (as on 13 July 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 "Speculative Buy” recommendation is also valid for the current price as covered in the report as on 14 July 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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