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This FTSE 250 stock is flying high! Would I buy its shares?

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FTSE 250 stock Kainos Group (LSE:KNOS) has been riding the tech stock wave of 2020 and as yet shows no sign of slowing down. The company is a leading IT provider with strength in cloud -ased digital services and its Workday operation.

The bull run on tech stocks has been exhilarating for some retail investors, but many now worry it’s coming to an end. With this in mind, sky-high price-to-earnings ratios (P/E) could be a warning sign that the price is unsustainable at this level. It makes me nervous. But then again, I can understand why some companies are simply better positioned to ride out the Covid-19 storm.

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Strength and resilience

Kainos Group has the makings of one such company. Its half-year trading update was very positive, noting strength across all aspects of the business. Accordingly, the Kainos share price has risen 146% in the past year and over 31% in the past month. However, it now has a P/E of 82 and even with public sector revenues projected to grow by 18% in FY21, I think that would still leave an adjusted forward P/E higher than desirable.

Nevertheless, as Covid-19 shows no signs of slowing down, and rolling out vaccines seems like it’s going to be a slow process, Kainos remains in a position to grow. The government is keen to continue to invest in cloud-based infrastructure, and Kainos has been building relations with the Government in order to provide that. This is likely the start of a long-term relationship that could extend its market share throughout the next year or two.

Recurring revenue streams

People are still shifting to working from home or adapting their workplace practices to be more digitally savvy. Kainos helps these customers, along with its Digital Services customers in the NHS and Public Sector. Transformation across these areas is vital and long term, bringing in recurring revenue for the group.

As well as the British Government and NHS on its books, notable clients include Netflix, Booking.com and TomTom. Its Workday Practice benefits from having an international presence and has been continually winning new contracts. Workday is actually an American software vendor that provides on demand financial management and human capital management software. Kainos is Workday’s leading European partner. It implements the Workday Software-as-a-Service (SaaS) platform for both its enterprise and government customers. Again, providing a service that generates repeat custom and recurring revenue. It also supports Smart, which is an automated testing platform for its Workday customers.

Money in the cloud

One area of demand in the NHS is digitising patient notes, to assist with a transition to telemedicine. Kainos has been working with the NHS for the past decade. It’s been rolling out the implementation of Evolve Electronic Medical Records and is now serving this as a cloud-managed service to over 30 NHS Trusts.

The Kainos share price has been building momentum because investors love quality and in uncertain times, quality wins hands down. Kainos pledged to pay a one-off dividend of 6.7p per share in July. If I already owned shares in this FTSE 250 stock, I would not consider selling them just now. I’m tempted to invest, but would prefer to buy in a dip.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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