Although fears of a second bubble may have been overstated, finding a great tech-related stock trading on a still-vaguely-sensible valuation feels like more of a challenge these days. That’s not to say it’s impossible. Here’s one that’s caught my eye.
Record first half
Over the last year, shares in Computacenter (LSE: CCC) have done rather well, rising 15% before today. On a longer timeline, the stock has been an even bigger winner for holders, having five-bagged in just nine years. What’s more, this morning’s interim results suggest that the shares are heading in only one direction.
In the six months to the end of June, revenue climbed 15% to £1.7bn with particularly strong growth being seen in Computacenter’s German business. Adjusted pre-tax profits also rose a very encouraging 66% to just under £42m. Even if some of the latter can be attributed to beneficial currency movements, the majority of growth appears to have been generated from improved operational performance.
While the business now faces the tough challenge of matching its performance in H2 last year, CEO Mike Norris stated that Computacenter remains “on track for a record performance” and “marginally ahead” of management expectations conveyed in its April trading update. In his words, Computacenter’s board has “never been more optimistic about the market’s potential, as customers invest capital, digitalise their businesses and require support to reduce their long-term operating costs”.
Today’s forecast-beating numbers have seen shares soar 17% in early trading. On a valuation of 18 times forecast earnings, however, the stock still looks a great deal, particularly as Computacenter also declared that it would return more cash to shareholders (approximately £100m) in Q4.
A risky bet?
For evidence that Computacenter’s valuation still looks more than reasonable, check out £2.3bn cap network security solutions provider Sophos (LSE: SOPH). Right now, its shares are firmly in nosebleed territory, trading as they are on 98 times 2017/18 earnings.
True, recent results have been more than positive. The company’s financial performance in Q1 was ahead of management’s own expectations thanks to strong demand for its next-generation anti-ransomware solutions following the high-profile WannaCry and Petya cyber attacks in May and June.
Having achieved a 16% rise in billings (19% at constant currency) over the three months to the end of June, CEO Kris Hagerman stated that the Abingdon-based company “continues to grow faster than the overall industry and gain share“. He also expects this momentum to continue, allowing the company to meet its full-year expectations.
Trouble is, with such high hopes comes the possibility of huge disappointment. While it would be hard to deny that Sophos has managed to build an enviable position in a white hot industry (leading shares to double in value over the last year), any sign of weakness will surely be punished by the market.
A huge drop isn’t guaranteed, of course. Just look at Fevertree, Purplebricks and Blue Prism for evidence of stocks that have continued to defy gravity. No, the question investors need to ask is whether they are happy with the level of risk they are taking by buying/holding a stock at this kind of valuation. It is, after all, the only thing we are able to control.
With its still-decent valuation, solid balance sheet and encouraging recent performance, I think Computacenter is a far better play for more cautious investors.