Key points

• Darktrace isn’t currently profitable.
• Wise is moving in the right direction.
• Idox Group could have some serious growth potential.

The Darktrace (LSE: DARK) share price has fallen 55% from its peak of 985p in September 2021. Investors clearly grew overexcited after its blockbuster IPO in April. While the company’s revenue and earnings outlook are improving, I think they still don’t yet justify the share price. I like to invest in tech stocks because of their scalability and critical role in the modern economy. But I think there are a couple of other options that would be better for my portfolio.

Cybersecurity

I still think that Darktrace has the chance to do well in the future. The company is in excellent financial health, has no debt and all its assets easily cover its few liabilities. Its AI driven, machine learning approach to cybersecurity could be nothing short of revolutionary, and its subscription business model could lead to a massive user base over the coming years. The problem simply is that Darktrace isn’t profitable yet and hasn’t been for some time. Revenues have increased by $80m in 2021, but earnings fell to -$149m.

Online payments

Wise (LSE: WISE) is an online payment and cash transfer company based in the UK. It too went public in early 2021 and it too saw its share price soar to 1,140p before slowly crashing back down to 649p at time of writing. A big difference between Wise and Darktrace however, is that Wise is profitable. Its margins are small, but 2021 has been a period of incredible growth for the company. Customers increased by more than 50% from 6m to 10m. Revenue jumped too from £302m to £421m. Again, only £39m of that was profit, but Wise has also been expanding into new territories and developing new products that could pay serious dividends in the future. These small profit margins could cause problems if the company runs into some unexpected issues, but for now all of the numbers are moving in the right direction. I’d be excited to add it to my portfolio.

Public sector software

Idox group (LSE: IDOX) is a software development company I’ve talked about a few times now. Currently trading for a mere 67.75p, it suffers even more acutely than Wise from small profit margins. It is profitable, but had a spotty couple of years in 2018 and 2019.

Earnings reports for the whole of 2021 have not been published yet, but for the financial year ending 31 October 2021, Idox reported revenue increased by 8% to £62.0m, and recurring revenue grew a further 2%.

If it can continue this growth over the coming years, I think we could see the share price rise significantly. It’s a bit of a gamble, but I’d happily add it to my portfolio.

What I’ve taken away from this research is that just because something is in the headlines doesn’t mean it’s a good investment. In fact, it could even mean the opposite. I’ll definitely keep my eye on Darktrace over the coming years, but for now there just seem to be other, better options for my portfolio.

The post The Darktrace share price is still overvalued. Here are 2 UK tech stocks I’d buy instead appeared first on The Motley Fool UK.

More reading

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• Wise: a hidden gem in the UK stock market
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• 2 world-class stocks to consider buying while they’re down 20% and ‘on sale’

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Here, I’m going to highlight five UK technology stocks I’d buy for my portfolio for 2022 and beyond. All five of these companies are already profitable and have the potential to get much bigger in the years ahead. 

One of the best UK tech stocks

The first tech stock I want to highlight is Softcat (LSE: SCT). It’s a FTSE 250-listed IT infrastructure and services business that provides bespoke, end-to-end technology solutions for businesses and public sector organisations. Its areas of expertise include cloud computing, cybersecurity, data analytics, and remote connectivity.

I see Softcat as a classic ‘picks-and-shovels’ play on the technology boom. In the same way that those selling picks and shovels during the 19th century gold rush made a fortune, Softcat should profit as businesses get up to speed digitally. It’s worth noting that here in the UK, a large proportion of small businesses are yet to achieve full digital transformation, so there should be plenty of opportunities for Softcat in 2022 and beyond.

Its financials are impressive. Over the last five years, revenue has climbed from £672m to £1,157m. Over that period, return on capital employed (ROCE) – a key measure of profitability – has averaged 65%, which is outstanding. These numbers indicate to me that Softcat is a high-quality business.

I’ll point out that the valuation here is quite high. Currently, the forward-looking price-to-earnings (P/E) ratio is about 36. This means there’s some valuation risk. If growth slows, the stock could underperform. Overall however, I think the risk/reward proposition here is attractive.

A top FTSE 250 tech stock

Next up is Kainos (LSE: KNOS). It’s an under-the-radar FTSE 250 company that specialises in digital transformation services. Its customers include the Home Office, the NHS, and Travelex.

Kainos has generated strong growth in recent years (five-year revenue growth of 205%) and recent H1 FY22 results showed further progress. For the six months ended 30 September, revenue was up 33% to £142.3m. Meanwhile, software-as-a-service (SaaS) bookings were up 118%. Looking ahead, analysts expect Kainos to generate revenue of £297m for the year ending 31 March 2022. That would represent growth of a very healthy 26%.

It’s worth pointing out that in November, its Chairman Tom Burnet spent £250,000 of his own money on Kainos shares. I see this insider buying as very encouraging. It indicates that the Chairman is confident about the future and that he expects the stock to rise. It’s worth noting that Burnet paid around £18 per share for his stock, which is pretty close to the share price now.

This is another technology stock with a lofty valuation. Currently, the forward-looking P/E ratio is about 48. I’m comfortable with the valuation however, given the level of growth here. It’s worth noting that analysts at Berenberg just raised their target price to 2,100p from 1,680p.

A work-from-home stock

A third UK tech stock I’d buy for 2022 is Gamma Communications (LSE: GAMA). It’s a leading provider of ‘unified communications’ (UC) solutions. UC integrates all of an organisation’s communication channels, including voice, video, instant messaging, and content sharing, to improve the user experience and help boost productivity. It’s a big growth market in today’s digital age in which employees want to work remotely. According to Grand View Research, the UC industry is set to grow by more than 20% per year between now and 2028.

Like Softcat and Kainos, Gamma has generated strong growth recently. Between FY15 and FY20, revenue jumped from £192m to £394. Over this period, ROCE averaged 27%, which is excellent. Looking ahead, analysts expect the group to post revenue of £452m for 2021 and £494m for 2022.

Gamma shares had a great run in the first half of 2021, but have pulled back in recent months. I think this pullback has created a buying opportunity. At present, the forward-looking P/E ratio here is around 24, which in my view is very reasonable for a company with Gamma’s track record and growth potential.

A play on e-commerce

Another tech stock that has experienced a pullback over the last few months and now offers more value is dotDigital (LSE: DOTD). It’s a software company that provides digital marketing solutions. Its main product is a cross-channel marketing platform designed to help organisations connect with their customers, analyse their marketing data, and grow their brands more effectively.

DotDigital has grown its revenues from £26.9m to £58.1m over the last five years which represents a healthy annualised growth rate of 16.7%. Looking ahead, I expect the group to keep growing on the back of the growth of the e-commerce industry, which is projected to get much bigger over the next five to 10 years. For the year ending 30 June 2022, analysts are forecasting revenue of £65.5m, which represents growth of around 13%.

Currently, the forward-looking P/E ratio here is about 44. That doesn’t leave a huge margin of safety. I can accept this valuation, however, as recurring revenues as a percentage of total revenues is high at over 90%.

A technology stock for the 5G revolution

Finally, I’d also buy Calnex Solutions (LSE: CLX) for 2022. It’s a Scottish technology business that specialises in testing and measurement services for telecommunication networks.

The reason I like Calnex is that the company is seeing high demand for its services right now on the back of the rollout of 5G infrastructure. Mobile networks need to be rapidly expanded to facilitate this new technology and this means a lot of network testing. It’s worth noting that the market for 5G testing equipment is projected to grow at around 9% per year between now and 2027. So, Calnex should have strong tailwinds behind it for many years to come.

The forward-looking P/E ratio here is about 23, which seems very reasonable, to my mind.

Tech stocks: the risks

I’ll point out that while I’m bullish on all five of these UK tech stocks, there’s no guarantee they will perform well in 2022. If we see interest rates rise next year, the technology sector could potentially underperform. Meanwhile, all of these companies face their own unique risks. If their growth slows, their share prices could fall.

I’m optimistic that 2022 will be another good year for the best UK technology stocks though. After all, we are in the midst of a technology revolution.

The post 5 top UK tech stocks to buy for 2022 appeared first on The Motley Fool UK.

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Edward Sheldon owns Calnex Solutions Plc, Gamma Communications, Kainos, Softcat, and dotDigital Group. The Motley Fool UK has recommended Gamma Communications, Kainos, Softcat, and dotDigital Group. 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.

Tech stocks offer some of the best value for money on the market, in my view. With low overheads in comparison to other businesses, they can become money printing machines. Amazon, Google, Microsoft, and Facebook are some of the most highly valued companies on the stock market. But this means investors have already found their value. Lots of investors, including Charlie Munger, are looking to Chinese counterparts in the hope that history will repeat itself.

But I think we have some excellent tech companies right here in the UK.

Frictionless transfers

Wise (LSE: WISE) is a company that facilitates money transfers and currency exchanges in near real time. This tech company just went public earlier this year and exploded in value, reaching a high of 1,140p in September. But the share price has, in recent months, been seeing a consistent downtrend and has fallen to 762p. This is to be expected as the market tries to determine the true value of the company.

Wise has increased revenue year on year, but has so far kept profit margins small as it continues to expand its operations. I do think that reduced travel over the next few months could push the share price down further. But revenue actually increased over the pandemic months, which tells me there is demand for this service regardless of how many people go on holiday. I’ll definitely be adding it to my portfolio.

Public sector systems

Idox Group (LSE: IDOX) builds software and data collection programmes for clients across the UK. Its largest customer base is the public sector as councils and government agencies use systems Idox designs to help with collecting and organizing important data. Just this week the Scottish Council of Comhairle nan Eilean Siar began using an Idox software programme to help organize its building and planning permissions data.

Idox currently operates with a very small profit margin and if anything goes wrong this could upset the company’s outlook.

But, once a computer system becomes entrenched in a company or institution and all of its employees learn to rely upon it, then it often becomes very difficult to remove. If this happens then I think the sky’s the limit for Idox.

Idox currently trades for a very low 69p and I’ll be adding it to my portfolio shortly.

Cyber security tech

Darktrace (LSE: DARK) has been in the headlines a lot this year. Like Wise, it exploded into value and rushed all the way up to the FTSE 100 in just a few months. But also like Wise it has seen a big fall in value as insiders sell off their shares and it has failed to grow fast enough to justify the high price.

Despite this, Darktrace has been growing. Revenues are up and expected to continue this way over the next few years. I definitely think that the share’s all-time high of 945p was unrealistic, but the current price of 397p is more reasonable. There could still be further downward inertia as shareholders lose their nerve, but the business remains strong, offering a high-quality product on a subscription model. I’ll be adding it to my portfolio but don’t expect to see it pay off for several years.

The post UK tech stocks: 3 of my top picks for 2022 and beyond appeared first on The Motley Fool UK.

More reading

• Why the UK might be the best place to look for growth stocks
• Is Wise now the UK stock market’s top growth share?
• Wise: a hidden gem in the UK stock market
• Scottish Mortgage has made a fortune on SpaceX and Tesla! Here are 5 UK stocks it owns
• 2 world-class stocks to consider buying while they’re down 20% and ‘on sale’

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.