My investment strategy to date has admittedly been relatively light on growth stocks. Despite countless hours of analysis on various companies, I have always leant more towards value stocks.
However, there’s one IT services company hitting its growth targets that has really caught my eye.
Softcat (LSE: SCT) is a market leader valued at a touch over £3bn. The UK-based company is a leading provider of IT infrastructure to corporate and public sectors, offering solutions including cyber security, digital workspace services and cloud computing.
According to Statista, the global infrastructure as a service market is set to grow from US$154.7bn in 2023 to $359.8b by 2028. This large and growing addressable market, while facing challenges of market saturation and security issues, has me excited.
I think the opportunity in this growth stock is just too good to pass me by. The company’s share price is down around 30% from its all-time high but has climbed 20% higher in 2024 at the time of writing.
A strong growth profile
With a strong industry profile, the company’s financial statements and investor reports are where I looked next.
Softcat’s half-year results last month only confirmed my belief. Despite reporting an 8.8% dip in half-year revenue, largely from lagging hardware sales, there was plenty to like about the company.
Softcat reported growing gross and operating profits alongside a healthy balance sheet. In fact, the company is debt-free, with £112.5m cash on hand. This should give the company more financial and operational flexibility, unconstrained by the high cash burn of servicing large debts.
All in all, the interim results confirmed what I thought – this looks like a cash generative and growing business. Softcat increased its headcount by 14.6% in the first half of the year as it looks to build capabilities and “scale to enable long-term market share gains in a growing sector”. This is music to my ears as a long-term investor.
There’s also the artificial intelligence (AI) angle that takes my fancy. Softcat has noted strong demand for generative AI and expects this to provide a tailwind for its own business going forward.
While shares in Nvidia and others have exploded amidst an AI scramble, I think Softcat could quietly benefit as an adjacent service provider in the space over the medium term.
Of course, I’m not naïve that my imminent Softcat purchase has its risks. Hardware sales remain under pressure and IT services is a highly competitive, and increasingly crowded, market. There’s the ever-present operational and public relations risks arising from cyber security breaches as well.
The company has a price-to-earnings (P/E) ratio of around 28, which is higher than Computacenter, trading around 16. That means some of this potential growth is already being priced into its current valuation.
The verdict
Softcat ticks all my boxes as a growth stock. A fast-growing industry, strong market position and healthy balance sheet has me itching to buy.
Yes, the company is a little on the expensive side. Yes, there are other competitors doing well in the space. Yes, there are risks that it doesn’t continue to achieve its growth targets.
However, I think at 1,615p per share, with the significant AI tailwinds looming, Softcat is one that will be in my portfolio in no time.
