Technology stocks are rising again. For a while, tech stocks were out of favour because investors were focused on reopening plays. However, it seems the market has suddenly remembered there’s a digital revolution under way and money is now rapidly flowing back into the tech sector.
Here, I’m going to highlight a top UK tech stock I’d buy today. I think this stock has a lot of potential in today’s digital world.
A top UK technology stock
Gamma Communications (LSE: GAMA) is a leading provider of unified communication (UC) solutions. UC incorporates voice and video calling, video conferencing, messaging, team collaboration, file sharing, and more.
The reason I’m bullish on Gamma Communications is that it looks set to benefit from the remote-work trend. Today, employees don’t need to be confined to a specific desk, phone, or computer to do their jobs. With the right technology, they can work from anywhere (as long as there’s an internet connection).
As more businesses go digital in the years ahead, Gamma should prosper. It’s worth noting that experts believe that between now and 2025, the unified communications-as-a-service market is likely to grow at a rate of around 25% per year.
Gamma has an impressive growth track record. Between 2015 and 2020, revenue climbed from £191.8m to £393.8m. Over this period, net profit also jumped from £18.3m to £64.2m.
Earlier this week, the company said it had seen continued growth in the first half of 2021. It also said it expects full-year results to be in the upper half of market consensus estimates.
A high-quality company
Top-line growth isn’t the only thing I like about Gamma Communications. This is a high-quality company. Recurring revenue is high at around 90% of total revenues and profitability is excellent (five-year average return on capital employed of 26.1%). The balance sheet’s strong too and the company also pays a growing dividend. Over the last five years, the dividend payout has risen from 6.6p per share to 11.7p per share.
I also think the stock’s valuation is very reasonable. Currently, Gamma sports a forward-looking price-to-earnings (P/E) ratio of about 34. In my opinion, that’s not particularly high given the company’s track record, quality attributes, and long-term growth potential.
Risks to consider
There are risks to consider here, of course. One’s the threat of competition. Gamma operates in a very competitive industry and it’s a small company compared to some of its peers.
Another risk is that the work-from-home trend could rapidly diminish as the world goes back to normal after Covid-19. I don’t think this is going to happen but if it does, Gamma’s growth could be impacted.
Overall however, I think the stock has an attractive risk/reward profile. In my view, this UK tech stock has considerable long-term growth potential.
Edward Sheldon owns shares of Gamma Communications. The Motley Fool UK has recommended Gamma Communications. 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.