Contrary to reports, the UK does have a listed technology sector, says broker Liberum, which has run the rule over the constituents and come up with its best bets.
Liberum said the technology is growing relative to GDP but the listed UK sector lacks scale, accounting for just 1% of the FTSE 350 compared to 30% of the S&P 500 and 10% of the S&P 1000.
Better bets come lower down the market value chain, suggests the broker, highlighting eight small-cap tech firms, that in its view, have potential.
These don’t come cheap but offer two times market average growth, strong balance sheets and positive earnings momentum.
“M&A is a recurring theme and GBG still looks the most vulnerable to an approach of companies covered,” added the broker.
Top tech picks
For exposure to AI, Liberum suggests Bytes (Buy, TP 660p) and Softcat (LSE:SCT) (Hold).
“Both offer proxy exposure to large US tech and are the best way to play AI. Every 100,000 Copilot licences sold adds 1-2ppts to their income.”
Cerillion (Buy, TP 1,700p) is best for momentum, according to Liberum, with its combination of high growth and returns. “Its growth runway got longer with the European tier-1 contract win and estimates still look too low,” the said broker.
GBG (Buy, TP 415p) and NCC (Buy, TP 170p) are in turnaround situations which are off the lows but have further to go.
“In June, GBG’s results will confirm a return to growth in Identity and NCC’s trading update should confirm margin recovery in its second half”.
The final two, Tracsis (AIM:TRCS) (Buy, TP 1400p) and 1Spatial (AIM:SPA) (Buy, TP 80p), are due a re-rating as they are in the process of pivoting from services toward software, said Liberum.
“As they do so, margins and cash flow will rise, which should drive a re-rating.”