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Are ARM Holdings plc and NCC Group plc the two best tech stocks in the UK?

While London is slowly becoming recognised as a global technology hub, when it comes to investing, it’s fair to say that there’s not an abundance of high quality tech companies listed in the UK.

Having said that, here are two strong performing UK-based tech stocks with plenty of future growth potential.

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Smartphone technology

It’s almost impossible to mention UK technology stocks and not mention ARM Holdings (LSE: ARM)ARM develops the microprocessor technology at the heart of many digital electronic devices including smartphones, tablets, sensors and servers.

There’s every chance you’ll use ARM technology today without even knowing it.

ARM is a big player in the smartphone market and concerns about future smartphone growth have seen the company’s share price stutter recently.

And while smartphone growth may indeed stall, you can be sure that ARM won’t be standing still. The company has a strong focus on R&D, and this should help propel the tech giant’s revenues going forward. In 2015, ARM invested £217m in R&D to broaden the product portfolio, and another £74m was invested in acquisitions to accelerate product development and create new revenue streams. 

One area I’m particularly excited about in relation to ARM is the Internet of Things (IoT). In layman’s terms, this basically means devices talking to each other. It’s an enormous growth market and one that ARM has large aspirations to be part of.

As one of the most popular tech stocks in the world, ARM has often traded on eye-watering multiples. And with the company’s strong record of revenue and earnings growth, combined with high cash flow generation and very little debt,  it’s not hard to understand why ARM has been such a popular stock for growth investors.

After a recent share price correction, ARM’s P/E ratio now stands at around 28 times next year’s earnings. Although this seems a little high at face value, given that ARM has grown its revenues at a compound annual growth rate (CAGR) of 19% over the last five years, this P/E ratio is probably justified.

ARM Holdings is a high quality company, and while its share price may have plateaued for now, I’m confident the growth story isn’t over here.

Cyber security specialist

In terms of hot sectors, it doesn’t come much hotter than cyber security right now. High on the agenda for any business leader, cyber security is a huge growth area and one company well positioned to capitalise on this theme is £800m market cap NCC Group (LSE: NCC).

Based in Manchester, NCC Group has plans to become the leading player in the expanding global cyber security market, as advanced threats continue to drive security spending.

A rapid acquisition spree in recent years has seen revenues grow from £47.6m in 2010 to £133.7m in 2015, a CAGR of almost 23%, and shareholders have done very well in this time, with the share price rising from around 100p five years ago to almost 300p today. 

A trading update in late April revealed strong momentum across the group, with revenue in the 10 months to the end of March growing at an impressive 60% year-on-year.

On a P/E ratio of 27 times next year’s earnings, NCC Group isn’t trading cheaply, but this is an exciting company with potential for plenty of growth on the horizon. 

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Edward Sheldon owns share in NCC Group. The Motley Fool UK owns shares of NCC. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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