2 tech stocks I’d buy for long-term returns

I think tech companies are great additions to diversify my long-term investment portfolio. Here are two UK tech stocks that look promising.

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The US stock market is flooded with tech stocks. In fact, five of the top six listed companies in terms of market cap are tech behemoths like Apple and Amazon. As we head towards a digital future, UK tech companies are gaining prominence and delivering great returns to investors. I think this is the right time to add some tech stock to my portfolio. 

These are the two UK tech stocks that I’d buy today as potential long-term investments.

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UK software giant

Sage Group (LSE: SGE) is a software company that provides business management solutions. It has been slowly gaining prominence as a tech behemoth and the figures back this up.

The company has shown steady revenue growth through the years. Post-tax revenue grew from £266m in 2019 to £310m in 2020. This 16% increase is based on its recurring revenue model where customers renew subscriptions to software services. 90% of the company’s revenue is now from recurring transactions.

According to Sage Group’s annual report, organic revenue from software subscriptions grew by 8.5% to £1.14bn in 2020. The total organic recurring revenue for the company in 2020 was nearly £1.6bn.

The company also has incredible customer retention figures of 97%. According to my colleague Rupert Hargreaves, this is because companies rarely switch accounting software as the process is time- and resource-consuming.

The company also has strong cash generation, with an underlying cash conversion of 123% and boasts a resilient balance sheet with £1.2bn of cash and available liquidity. This allowed for a 2% increase in dividend yield which stood at 17.25p for 2020.

The software sector is cluttered and Sage Group faces stiff competition from established international businesses. But the company continues to impress, adapting through a turbulent pandemic period. This puts them on my watchlist of the best tech stocks for long-term returns.

E-commerce driver

dotDigital (LSE: DOTD) is a digital marketing company that provides automated omnichannel strategies for businesses. This FTSE AIM 50 company is a booming tech stock that has grown over 380% in the last five years.

Its share price rocketed recently, rising 120% in the last 12 months. The net revenue for 2020 was £47.4m, a 12% increase from 2019 which is impressive when factoring in the lockdown. The company also grew its cash position by 31% in 2020.

Engagement Cloud, the SaaS platform offered by dotDigital has a strong consumer base with recurring revenue accounting for 91% of total income. It has a strong international presence with 31% of revenue coming from overseas markets driven by partnerships with global e-commerce giants like Shopify.

E-commerce accounted for approximately 36% of the total retail sales last year and this shows me that the online retail boom during the pandemic is here to stay. A lot of people I know prefer shopping online and I think this switch will translate to an increased focus on online marketing, which dotDigital specialises in.

There are concerns for digital marketing with increasing scrutiny regarding data protection across the world hindering targeted marketing. This could affect dotDigital’s results in the future as it relies heavily on accumulating user data to fuel its AI-driven marketing.

But digital marketing is here to stay and I am confident that dotDigital will continue its strong performance in the market which earns it a spot on my list of UK tech stocks to watch out for.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Shopify. The Motley Fool UK has recommended Sage Group and dotDigital Group and has recommended the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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