Stifel analysts have thrown their weight behind a cohort of cyclical and undervalued UK technology stocks in what is otherwise expected to be a challenging trading environment.
Among the mid caps, analysts graced information technology and software group Kainos Group PLC (LSE:KNOS) with a 'buy' recommendation “as the company prepares for a new cycle of growth that we think will begin to emerge by year end, helping its share price”.
Stifel also tipped specialist market research and data company Next 15 Group PLC (AIM:NFG) given its “broad exposure to growth trends”, while Future PLC (LSE:FUTR) has emerged as a strong value play.
Future’s digital media wheelhouse is seen as potentially facing headwinds in the form of artificial intelligence and reduced spending on consumer technology products, but its heavily discounted share price may be overdone.
“In our view, the current valuation should provide something of a buffer to further disappointment, whereas the upside opportunity should growth be restored is considerable,” said Stifel.
Small-cap stock picks
Stifel expects a solid year ahead for a number of small-cap UK tech stocks too, including cutting-edge monitoring technology company Seeing Machines Ltd (AIM:SEE, OTC:SEEMF).
“The stars are beginning to align” for Seeing Machines, said Stifel, particularly given its partnerships with numerous tier-one automotive components suppliers. “While there have previously been two main providers of (driver monitoring systems) in the industry alongside Smart Eye, we think Seeing Machines is moving firmly into the lead with production volumes rising rapidly.”
Bango PLC (AIM:BGO, OTCQX:BGOPF), which has developed a unique purchase behaviour technology that enables millions of users to buy the products and services they want, “remains one of the best value small caps in our coverage”, said Stifel.
That is despite shares performing relatively well in 2023 having added 11% versus the FTSE techMARK index.
Expect further tech de-capitalisation
Stifel expects more concentration in the UK technology sector going forward.
According to the data, 37% of the entire UK technology sector’s enterprise value has been acquired over the past 18 months.
Technology sector de-capitalisation continues: of the entire UK Technology sector enterprise value, with notable departures such as EMIS, Aveva, Instem, Blancco, Kape, Micro Focus, Avast, much of Ascential, and Kin + Carta.
“Given the levels of valuation and available funds at private equity buyers, we think further M&A activity will continue,” said Stifel.