The tech boom of recent years has been richly rewarding for many investors. With rapid market growth and high profitability, tech firms like Apple and Google parent Alphabet have rewarded shareholders handsomely. Like many investors, I constantly ask myself which tech shares to buy.
Lots of US tech names jump to mind. But I find it can be more difficult to pick UK tech names. Many don’t have the familiarity or well publicised success of their Silicon Valley peers. But there’s one UK tech name which I’d buy for its market position and prospects.
Tech doesn’t have to be hot to be exciting
A lot of tech shares are pioneers in exciting areas of new thinking. They have big addressable markets. Often they’re so cutting edge that they help to create those markets. But I don’t think that’s a necessary requirement for an investment.
When looking for tech shares to buy, I hunt for an investment story based on scalability. If a company is able to develop something digital and roll it out to an ever wider user base without significant incremental costs, the business potential can be huge. Each extra customer brings revenue, but little or no cost. Think of how Microsoft did that with its Office software suite, for example.
Ideally, development costs shouldn’t be overwhelming, the customer base should have money to spend and the product should be sticky. Stickiness means that as customers use the products, they become ever more familiar with them. The more they use them, the likelier they are to stick with them.
That’s why, when considering tech shares to buy, I don’t necessarily look for a new or exciting market opportunity. I believe a company simply needs a good solution for customer needs that’s scalable to the right number of customers to make it attractive to me. An interesting example is accounting for small businesses. Small and medium-sized enterprises or SMEs have accounting needs year in and year out – and are willing to pay for it. Software that helps them is therefore possibly a compelling tech story.
I rate Sage among the UK tech shares to buy
Enter Sage (LSE: SGE). This Newcastle-based company may not be widely known but its accounting software products are well regarded. Its SME focus gives it a sizeable, attractive market niche.
The company has been rewarding for shareholders. Thanks to substantial cash flow, it has been a reliable dividend payer. It has hiked its payouts annually for several decades. Product stickiness is very strong – last year, the renewal rate by value was 101%. The more years that an organisation uses Sage software, the higher I judge its switching costs to be. That means renewals are likely to continue at high levels, leading to ongoing strong cash flows.
The company’s share price has moved down lately. Analysts didn’t like the fact that annual profits fell last year. The City also reacted poorly to a plan to cut margins by investing more in research and development. But that sort of research could help the company fight new competitors like Xero. I reckon Sage offers a double advantage: a proven solution in a profitable, sustainable niche. If I was looking for UK tech shares to buy, I’d purchase Sage stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. christopherruane has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), and Microsoft. The Motley Fool UK has recommended Sage Group and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.