UK tech companies are something of an endangered species. But FTSE 250 firm NCC (LSE:NCC) is an exception that offers investors exposure to one of the most attractive markets around.
The company is in transition at the moment and the stock is down 14% in the last 12 months. So now seems like a good time to look at a potentially undervalued opportunity.
Cybersecurity
There’s a lot to like about the cybersecurity industry. Governments and businesses know that cutting corners is risky and the rise of artificial intelligence (AI) is only likely to exacerbate this.
Enter NCC – a FTSE 250 company that – in terms of sales – is 80% cybersecurity and 20% secure software code storage. But the business is unique in a few ways and not all of them are helpful.
NCC is a specialist in penetration testing, which involves simulating a cyber attack on a system to find where its vulnerabilities are. This, however, isn’t the most attractive business.
These services can often be commoditised, which leads to limited pricing power. And while some firms have to do them for compliance, they’re often one-off events, rather than recurring contracts.
This is why the stock is down. Sales in the cybersecurity division fell 6.6% in the first half of the year as customers looked to pull in their spending in response to macroeconomic challenges.
In response, NCC is looking to shift its business to focus on long-term contracts with recurring revenues, rather than commoditised one-off contracts. But this isn’t going to be straightforward.
A company in transition
There’s an obvious attraction to replacing one-off contracts with long-term recurring revenue. Most obviously, it makes the company more robust during economic downturns.
The transition, though, won’t be entirely straightforward. For one thing, NCC will have to compete with the likes of Crowdstrike and a number of other big names.
That’s one of the things I think investors often overlook with cybersecurity stocks. The demand side of the equation looks very attractive, but there’s a lot of competition on the supply side.
Furthermore, the move also represents a shift away from NCC’s core competence. It’s known for its technical expertise in penetration testing, but this is what it’s looking to move away from.
Selling off the software code storage busines is also an interesting move. While it’s only 20% of total sales, it’s the only part of the company forecast to grow in 2025.
The firm hopes to use the proceeds for a combination of shareholder returns and reinvestment into cybersecurity. That sounds good, but there are no guarantees about what the sale might raise.
Investing in cybersecurity
Anyone who thinks the UK doesn’t have any tech stocks should take a look at NCC. It’s a legitimate example of a cybersecurity company that’s listed on the FTSE 250.
Not every stock in a particular industry is the same, though, and NCC is a company in transition. If it can pull it off successfully, then the results could be spectacular, but there are big risks.
With my own money, I prefer to stick to businesses where I have a better sense of what sets them apart from the competition. But for the right investor, the opportunity could be interesting.
