In recent months, I haven’t bought that many stocks for my portfolio. One reason for this is that I’m pretty happy with my portfolio right now. Another is that I haven’t been seeing many really compelling opportunities.
That said, I did buy one stock for my portfolio last month and that was a UK tech stock that looks set for solid growth in the years ahead. Interested to know what company I invested in? Read on and I’ll tell you…
The 1 stock I bought
The stock I bought last month was Gamma Communications (LSE: GAMA). It’s a leading provider of unified communications (UC) solutions. UC incorporates voice and video calling, video conferencing, messaging, team collaboration, and file sharing – all of which are now ‘must haves’ for businesses in today’s digital world.
I already had a small position in Gamma however. When the share price pulled back after the company’s H1 results, I boosted my holding significantly.
Why I’m bullish
The reason I’m bullish on Gamma is that the company is benefitting from the ‘digital transformation’ boom. In recent years, businesses all across the world have embarked on digital transformation journeys in order to increase competitiveness and enhance resilience.
UC is a key component of digital transformation. A robust UC system provides an environment where employees have everything they need to work, connect, collaborate and look after customers, wherever they’re located.
Looking ahead, the market’s projected to grow substantially as businesses continue to digitalise. According to Grand View Research, the global UC market is expected to expand by around 20.5% per year between now and 2028. This should provide some big tailwinds for Gamma.
Gamma’s a very impressive company, in my view. Over the last five years, it’s grown revenue from £192m to £394m, which represents a compound annual growth rate (CAGR) of 15.5%. Net profit over the five years has climbed from £18.3m to £64.2m, which represents a CAGR of 28.5%.
Over this period, return on capital employed (ROCE) has averaged 27%, which shows the company’s very profitable. Debt on the balance sheet is negligible, meaning the company’s financially sound.
H1 results for the six months to 30 June showed further growth. Revenue for the period was up 23% year-on-year, while adjusted earnings per share were up 30%. The dividend was increased 13%.
Looking ahead, analysts expect revenue of £454m for the full year, which would represent growth of around 15%. Overall, I see it as a high-quality business.
There are some risks to the investment case, of course. One is in relation to the group’s expansion into Europe. This may not be all smooth sailing. For example, acquisitions may not go to plan. It’s worth noting that this is a highly competitive industry, so Gamma’s likely to face plenty of competition from rivals.
Overall however, I think the risk/reward proposition here is attractive. With the stock now trading on a forward-looking price-to-earnings (P/E) of less than 30, I see it as a good buy for my portfolio.
Edward Sheldon owns shares of Gamma Communications. The Motley Fool UK has recommended Gamma Communications. 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.