Why I’m not missing out on this underrated growth stock at 1,615p

Our writer is set to buy this growth stock that is increasing profits, headcount and looking to capitalise on the rise of generative AI.

| More on:
Elderly father and adult son work in the garden

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ken Hall has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Softcat Plc. 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.

More on Investing Articles

Photo of a man going through financial problems
Investing Articles

Down 15% in a week! What’s gone wrong with the National Grid share price?

The National Grid share price isn't supposed to crash but now it has. Harvey Jones is wondering whether to take…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Taylor Wimpey just paid me £158.78. I’m aiming to turn that into a £100k yearly second income

Harvey Jones says small, regular dividend payments can turn a few pounds into a mighty second income, if he gives…

Read more »

A pastel colored growing graph with rising rocket.
Value Shares

These FTSE 250 shares are tipped to rise 14% to 18% in the next year!

Looking for the best FTSE 250 momentum shares to buy? Here are two that City analysts expect to soar in…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Lloyds’ share price is up 20% in 3 months! How high can it go?

Lloyds’ share price has ripped higher recently. Here, Edward Sheldon provides his view on the level it could potentially climb…

Read more »

Investing Articles

Why the Rolls-Royce share price could continue to outperform

The Rolls-Royce share price keeps moving forward, but this Fool thinks it's still behind where it ought to be after…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

The City expects explosive growth in earnings from this almost-penny stock

It’s rare to find earnings predictions as robust as those for this not-quite-a-penny stock, so I’d research and consider it…

Read more »

Investing Articles

As earnings rise 600%, is Nvidia still the best AI stock to buy?

With the supply and demand equation still looking strong for Nvidia, is the stock still the best AI opportunity for…

Read more »

Value Shares

Cheap UK stocks are soaring! Here’s 1 to consider buying now

In recent weeks, many UK stocks have surged. Here, Edward Sheldon highlights a blue-chip FTSE 100 share he believes could…

Read more »