Artificial intelligence (AI) is showing no signs of slowing down, with US tech giants like Nvidia and Apple dominating the sector.
While admittedly it’s hard to compete with these behemoths, I’ve identified two lesser-known FTSE 250 stocks that work in the sector. I’m considering how these well-positioned British tech companies could benefit from AI’s rapid growth.
Computacenter
Computacenter (LSE: CCC) is an IT hardware and software reseller headquartered in Hatfield, UK. Its services include provision and support of cloud networking, data centre, and cybersecurity solutions to a diverse range of clients, including Audi, Bosch, and the NHS.
Its relatively low market cap belies a broad international reach, with many well-known customers in the tech sector. A significant portion of the firm’s revenue stems from data centre contracts in North America where it partners with the likes of Microsoft, Amazon, and Google. But its reach extends even further, with consultants working in 77 countries worldwide to bring in revenue for the company.
The cyclical nature of global IT spending means the share price tends to go through long periods of decline. This may be one reason why it is currently so low, down 20% this year. The current economic uncertainty has squeezed budgets, resulting in reduced IT spending. If this doesn’t improve, the share price could fall further in the short term.
However, the company does a good job of counteracting this effect with dividends. Since 2006, payouts have increased every year barring a brief cut during the pandemic. In two decades, dividends have increased at a rate of 15% per year from 7.5p to 70p per share.
The dividend yield is 3.2% with a payout ratio of 47%. With little debt and high cash flow, the payments are well covered. I don’t have capital to buy the shares today but the stock is on my list for 2025.
Kainos
Based in Belfast, Kainos (LSE: KNOS) is a slightly smaller outfit than Computacenter but with an equally broad reach. It helps businesses improve efficiency and reduce costs using digitalisation techniques powered by AI and machine learning.
Some of its more notable clients include tech giants like Netflix and Shopify and fashion outlets ASOS and John Lewis — not to mention several UK Government agencies.
But the company it works closest with is Workday, the $71.6bn US business software developer used by 35% of FTSE 100 companies. Earlier this month, Workday announced plans to invest over £550m in the UK over three years. Kainos helps UK companies integrate Workday’s Human Capital Management (HCM) software into their systems, having developed proprietary software to reduce the operation’s complexity.
However, its increasingly concentrated focus on Workday makes it heavily reliant on the software’s success. If a competitor muscled in on Workday’s market share, the knock-on effect could hurt Kainos’ profits and share price.
In its latest interim results posted on 11 November, revenue decreased 5% while earnings per share grew 15% and cash increased 34%. The share price is down 15% in the past year but has increased 360% since it was listed in July 2015.
It pays a reliable dividend with a 3.5% yield and 68% payout ratio. With no debt and £151m in cash, payments are well covered and have increased steadily since 2016. I’d buy more of the shares today if I had the cash!
