With Nvidia beating earnings estimates recently and gaining over $250bn in market cap in a day following this, it’s safe to say technology is a popular place to invest right now. However, I wanted to look where others may not. So, I found three cheap shares that should benefit from growing artificial intelligence (AI) trends in the UK.
Kainos Group
I’ve made a note that most technology shares are usually quite expensive. So, I’ve looked for investments below £30 a share, which I consider cheap for the industry.
I’m starting with the cheapest first and the one I think could be the best. Kainos Group (LSE:KNOS) sells for just £11 a share as I write.
The firm specialises in digital transformation services. It has crucial expertise in cloud services, artificial intelligence, and software development. Listed on the London Stock Exchange, it’s also part of the FTSE 250 index.
It focuses significantly on generative AI and machine learning, announcing £10m more dedicated to this in August 2023. For example, it’s planning to train over 1,000 employees in AI tools. It uses these capabilities to aid in demand forecasting, document insights, fraud detection and digital assistant technologies, among other services.
Also, I think its balance sheet is reasonably well set up to allow it to continue expanding in the area. With a roughly equal amount of debt to equity, I’m quite confident in its financial health.
The shares are selling at 47% below their high, so I think this is definitely an opportunity for me to buy a stake at a cheap price.
Notable risks
There are risks with this company that I’ve discovered during my research. For example, while it has a history of dividend growth, it paid out more than half its earnings to shareholders last year. That means its present passive income benefits might not be sustainable.
Also, the technology industry is known to be volatile. I think over the long term, Kainos has the potential to become overvalued. Even at the present price, which I consider cheap for the shares, they’re still selling at a price-to-earnings ratio of 20 based on future income.
So, the investment might not be cheap when compared to the wider industry, but it is certainly cheap compared to what’s usual for the business.
Another two investments I’m considering
While Kainos particularly grabs my attention right now, Softcat and Computacenter look good to me, too.
Softcat’s shares are a bit cheaper than Computacenter’s — £15 compared to £29. They’re both IT infrastructure services providers. Computacenter is only selling at 4% below its high, while Softcat is 34% below its high, which I find more attractive for obvious reasons.
I think the market has reasonably valued both of these businesses. Also, I consider them cheap when I compare them to tech companies in America.
However, I have to bear in mind that they both have balance sheets that are notably weaker than that of Kainos.
Also, I need to remember that putting too much money into the technology sector would be bad for my diversification. That could put me at greater risk of loss than if I spread my money across multiple countries, sectors and management styles.
I haven’t bought any of these shares yet, but they’re all on my watchlist at the moment.
