The UK market doesn’t have a tech-friendly reputation. Tech firms here have achieved poorer valuations than their US counterparts because British investors tend to be risk-averse.
US investors have a bigger risk appetite when it comes to funding loss-making firms until they achieve the hoped for scale. This means they can then take advantage of the firms’ rapid growth and convert it into huge profits. But the UK market is more interested in dividends, so it isn’t as willing to fund unprofitable ventures.
No wonder Britain’s popular unicorns (start-ups worth at least $1bn) often relocate to America.
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Steer clear of companies raising funds
Nevertheless, there are plenty of UK technology stocks listed in London. In the small-cap sector in particular there are several unique stocks that offer potential upside. But first of all, any company that is in need of a potential fund raising is one I’d be steering clear of.
Companies that are cash generative should be favoured as they are not reliant on external cash injections; investors are now favouring profitable growth over growth at any cost. Interest rates have risen, which has increased the cost of capital and the required rates of return on investment projects, which in turn has lowered investors’ appetite for risk. Let’s have a look at some tech stocks listed in London.
Overlooked gems in the small-cap sector
One firm I have followed for some time (and am no longer holding) is Eagle Eye (Aim: EYE). It is a promising software as a service (SaaS) stock in the business of marketing and real-time digital promotions. SaaS businesses create software and sell it, usually on a subscription basis.
Eagle Eye helps other companies with systems governing the redemption of codes and vouchers, for instance, as well as loyalty schemes (Pret A Manger’s coffee subscription is run by Eagle Eye). These services help establish and expand a relationship with clients.
The company has been listed since 2014, but only in recent years has it become cash-flow positive and profitable. Profit forecasts for 2023 and 2024 make this an eye-wateringly expensive share to buy, so unless there are significant upgrades I would be reluctant to buy this on valuation alone.
However, I can see this stock being a multibagger over the longer term.
Journeo (Aim: JNEO) is a UK-based specialist provider of transport technology operating through provides video surveillance to improve passengers’ and drivers’ safety, while passenger systems comprise hardware and software for billboards and ticketing.
Until recently I’d pegged this stock as a slow burner that wasn’t for me. That could change given the recent acquisition of IGL Limited, which will add £12m in revenue and approximately £2m in pre-tax profit to the enlarged group in the first full year of the acquisition.
The stock is on a price/earnings (p/e) ratio of below seven, so if the acquisition does start to drive serious growth, then the stock could be in for a rerating. It’s one to watch.
A gambling stock that’s back on track
Best of the Best (Aim: BOTB) is a gambling business that has made effective use of technology to transform its margins.
You may have seen it at work in airports or shopping centres (a typical scenario would be a car accompanied by a sales person trying to sell tickets to win it). Now everything is done online. The stock was in the right place at the right time when lockdown hit: people suddenly had more money and time to invest or gamble.
The shares soared to 3,500p, but the group warned on profits as acquisition costs increased and players’ spending declined.
I hold a long position here as the half-year report showed the business is still profitable and players’ numbers have normalised, which suggests the return to growth is back on track. The family office of gambling- software entrepreneur Teddy Sagi has taken a 29.9% stake, implying scope for expanding internationally.
Dealing with critical functions for businesses
PCI-PAL (Aim: PCIP) provides software to help companies take payments and store customers’ data securely, helping them comply with financial regulations.
It’s a UK-focused business, but is beginning to expand rapidly in the US, Canada and Australia. Its recent interim results revealed sales growth of 33% and sustainable cash-flow breakeven is being targeted for late 2023.
However, Sycurio, a software group, has launched a patent-infringement lawsuit against PCI-PAL, which has now filed counter-claims. This is definitely a reason not to buy shares in the company (although I hold a long position here), but any positive news on the legal case is likely to lead to a rerating.
Altitude (Aim: ALT), which owns a platform connecting buyers, sellers and manufacturers of promotional merchandising, featured at 31.5p in my “four small caps to buy in 2023” article in MoneyWeek last December. Since then, the company has announced an unexpectedly positive trading update, with broker Zeus upgrading its pre-tax profit forecast for the year to 31 March 2023 to £0.8m from £0.5m.
Technically, this isn’t a UK technology stock, aside from the London listing. While the p/e ratio (even after the profit upgrade) looks expensive, there is a huge market to go after. Continued execution by management could make the stock a multibagger over time.
Michael Taylor holds long positions in BOTB, PCIP, and ALT. You can get Michael’s monthly Buy The Breakout newsletter for free at shiftingshares.com. Follow Michael on Twitter @shiftingshares.
