I love it when I find a growth stock that is also selling for cheap. It’s rare to catch the best of both worlds. After all, stellar companies that everyone is buying a stake in aren’t going to have low valuations. That’s why I wait for a change in investor sentiment surrounding a quality company. When the price reduces as a result, I look at buying my shares then. This is one of Warren Buffett‘s most famous teachings. He says, “Be fearful when others are greedy, and be greedy when others are fearful”.
A British leader in technology
This brings me to the company in question today, Kainos Group (LSE:KNOS), which I certainly consider to be one of the most important technology companies in the UK.
I think at this time when so many industries are going to be disrupted through organisations that are effectively harnessing AI and automation, Kainos is incredibly well-positioned to capitalise off of a growing demand for digital efficiency.
It’s my opinion that the companies that equip themselves appropriately with technology are going outcompete the firms that don’t. That’s because higher technological capability should translate to increased profitability margins. That means lower costs for products and services or better offerings altogether at still competitive pricing.
Therefore, it’s going to become more necessary than ever to adopt AI and automation technology within workplaces.
Kainos’ range of services, from intelligent automation to Workday services, are already used by clients like Shopify, Tripadvisor, Netflix, the NHS, and the Home Office. I think a whole host of other smaller companies will be seeking its help soon.
Opportunity beckons
Around 2023, Kainos entered a stage of slower growth than it was used to for the past three years. The market didn’t like this, and investors began selling the shares heavily in 2022. Partly, I reckon this is because people began to question whether Kainos’ valuation was reasonable enough to justify the slower growth that was coming.
While that concern may have been justified, my opinion is that a 55% decline from all-time highs is unwarranted. Around 2020, when the pandemic was in full swing, investors got exuberant about all things tech. Many smaller tech companies saw their valuations rise as a result. However, I don’t think, in Kainos’ case, it was ridiculous for the growth the firm saw. And after the recent massive price decline, the price-to-earnings ratio is 25% lower than its 10-year median. So, I think I’ve got a real opportunity on my hands here.
Tech will be the new normal
One of the nuanced risks I’ve assessed is that Kainos’s strong growth might not be sustainable over the long term unless it successfully navigates an operational shift later. The reason I say this is that it focuses on digital transformations for businesses. However, once most companies have already saturated their workflows and become competent with technology, the level of services and products that Kainos remains valuable for will diminish. Therefore, it might have its services relegated to maintenance and speciality operations, providing less lucrative revenue growth than it’s seeing now.
A top contender
Overall, I admire this company a lot. The shares are high up on my watchlist, and I might invest in it soon.
