Tech stocks are often the first destination for growth investors. Today the entire world is driven by technology, from handheld devices to critical software. And with demand skyrocketing for solutions in areas like automation, cybersecurity and fintech, there are plenty of emerging opportunities for investors.
With that in mind, let’s dive into the realm of tech stocks to discover what these businesses do and explore some of the UK sector leaders today.
What are tech stocks?
As the name suggests, tech stocks — or shares as they’re often referred to in the UK — can be any business providing a technological product or service. The most common form is a software solutions enterprise. However, this is only the tip of the iceberg.
Electronic device manufacturers, cloud infrastructure providers, content streaming groups and digital payment platforms are all prime examples of technology businesses. And that’s despite the fact that each operates in different industries with contrasting target audiences.
The barriers to entry for this sector aren’t exactly high. Anyone with a laptop, an idea and a strong determination can start coding with next to no budget. In fact, that’s precisely how some of the biggest tech stocks today got started.
As a result of this abundance of competition, these businesses are often rigorously investing in research and development (R&D) as well as marketing to the point that most stay unprofitable for many years. That makes them highly dependent on external financing typically raised through equity issues even after their initial public offering (IPO).
Needless to say, tech shares carry a higher risk profile than the average business. But if we travel across the pond and look at the S&P 500, the vast majority of its returns in the last decade have been driven by tech stocks like Apple, Microsoft, Amazon and Meta (Facebook). In other words, the elevated risk comes with an even more considerable reward potential.
With that in mind, here are five leading UK tech shares in order of market capitalisation.
Top tech shares in the UK
|Ocado Group (LSE:OCDO)||£8.94bn||An online grocery business transforming itself into a robotics automation enterprise.|
|Avast (LSE:AVST)||£5.89bn||Leading cybersecurity firm serving over 435 million users worldwide.|
|Wise (LSE:WISE)||£5.72bn||A complete digital banking solution for international money transfers, currency storage, and payment processing.|
|Darktrace (LSE:DARK)||£3.13bn||A business-facing cybersecurity platform leveraging the power of machine learning.|
|Kainos Group (LSE:KNOS)||£1.75bn||Leading expert in technological transformation, enabling clients to maximise their operational efficiency.|
Ocado Group is best known for being a key player in the online grocery space. The business runs a website that allows consumers to order groceries from the comfort of their own homes. And during the height of the pandemic, demand for such a service skyrocketed.
This e-commerce operation remains a core part of the business today. However, management is paying far more attention to the lesser-known side of the company – its robotics platform.
What has helped make Ocado’s online grocery store a success over the years is its ever-growing investments and research into robotic automation. Today, almost every aspect of its fulfilment centres are run by machines, drastically reducing labour costs and accelerating the process of packaging customer orders for delivery.
The tech stock is now offering its warehouse automation platform to other retailers under the name Ocado Smart Platform (OSP) for some pretty substantial fees. But by providing significant cost savings, the firm has secured contracts with companies like Morrisons in the UK, Kroger in the US, and a handful of others.
- Market Cap: £8.94bn (as of 21 Mar 2022)
- Average Daily Volume: 2.05m
- HQ: Hatfield, UK
- Cash/Debt: £1,470m / £1,828m (as of 28 Nov 2022)
Avast is a tech stock that operates in the currently surging cybersecurity industry. The group offers a portfolio of anti-virus and security solutions suitable for personal computers as well as enterprise data centres.
It’s probably best known for its free personal anti-virus solution. The freemium technology protects personal computers from most threats. But its capabilities can be further extended through paid upgrades like its Cloud-Backup service, which prevents data loss in the event of a ransomware attack.
Management’s strategy of offering this free solution has filled up a massive pool of 435 million monetisable users, which it can directly target with marketing campaigns and promotions. And it’s an advantage that rival group NortonLifeLock is currently trying to get its hands on through an $8.6bn merger. But the deal is currently receiving antitrust regulatory pushback, which could halt it dead in its tracks.
- Market Cap: £5.89bn (as of 21 Mar 2022)
- Average Daily Volume: 4.42m
- HQ: London, UK
- Cash/Debt: £435m / £838m (as of 31 Dec 2022)
Wise is more commonly known by its former title TransferWise, and is a provider of digital financial solutions serving over 10 million customers worldwide. What started out as a simple money transfer business has evolved into a complete digital banking solution.
Using the tech stock’s platform, users can send and spend money abroad to 80 different countries, as well as receive and store payments in multiple currencies. Developers can integrate its payment technology into their own applications through APIs, and businesses can take advantage of its agile banking services.
Of course, all of these solutions can be achieved through traditional banks. However, the cost of doing so is significantly higher and is far less efficient. For example, a conventional international bank transfer can take three working days. Wise can do it almost instantly for a fraction of the cost, in most cases.
- Market Cap: £5.72bn (as of 21 Mar 2022)
- Average Daily Volume: 1.48m
- HQ: London, UK
- Cash/Debt: £5,392m / £98m (as of 31 Dec 2022)
Similar to Avast, Darktrace is a cybersecurity enterprise. However, it’s strictly business-facing and takes a different technological approach to fight cyber threats. Rather than taking the traditional route of hard-coding solutions, the tech stock’s software suite is powered by machine learning.
Whenever encountering a new threat, an AI programme analyses the attack to automatically derive a solution. Once the threat has been dealt with, the platform knows how to prevent such an attack again in the future, making its defensive capabilities grow stronger with each encounter. In other words, the software behaves similarly to a self-teaching immune system for computers.
The firm is still a relatively new entrant into the cybersecurity industry. But it’s already serving over 6,531 clients worldwide, protecting almost all aspects of their digital operations including cloud servers, email, internet of things (IoT) devices, and private networks.
- Market Cap: £3.13bn (as of 21 Mar 2022)
- Average Daily Volume: 3.43m
- HQ: Cambridge, UK
- Cash/Debt: £366m / £33m (as of 31 Dec 2022)
As tech shares go, Kainos is pretty under the radar. The company is an expert in executing digital transformations within businesses and governmental agencies. This involves moving from traditional systems to modern-day cloud-based and AI-driven automation platforms.
The tech stock also provides a suite of consulting and software solutions to further improve talent management courtesy of its partnership with Workday. Clients can use these services to manage operations, payroll, recruitment, security, and even its financial accounts.
With companies and governments worldwide looking to reduce spending and improve operational efficiency, Kainos has had little trouble attracting customers. And despite its relatively small size, the group has secured contracts with the NHS, the Home Office, and even the Bank of Ireland.
- Market Cap: £1.75bn (as of 21 Mar 2022)
- Average Daily Volume: 231,710
- HQ: Belfast, UK
- Cash/Debt: £80m / £3.22m (as of 31 Dec 2022)
Are tech stocks right for you?
The UK tech sector isn’t as closely followed as its counterpart in the US. Yet that doesn’t mean there aren’t excellent opportunities for investors willing to take on additional risk.
Just looking at these five tech stocks, an investor who bought equal positions in each over the last half-decade is now enjoying a 196.8% return! That’s a 24.3% annualised return, smashing the FTSE 100 by a landslide.
But it’s not been a completely smooth ride. For example, investors who bought shares of Wise in its IPO last year are currently enduring a 44% loss.
Risk comes with the territory. And that means tech stocks aren’t suitable for all investors. But for those keen on reaping these potential returns, a diversified approach may be a sensible route. By buying a basket of shares consisting of promising UK tech companies, the odds of buying into a winner go up and should help irradicate the lacklustre returns of the losers.