UBS has turned more cautious on London-listed Bytes Technology Group PLC (LSE:BYIT, FRA:9NY, JSE:BYI), downgrading the software reseller to 'Neutral' and slashing its price target to 305p from 415p as rising costs, Microsoft incentive risk and AI-driven budget shifts cloud the outlook.
The Swiss bank's analysts noted Bytes’ FY27 gross profit guidance was broadly in line with expectations, but the profit outlook disappointed after management guided to roughly flat EBIT, weighed down by an additional £4.5 million of costs. That came in well above the roughly £2 million previously anticipated, prompting UBS to cut earnings estimates and take a more guarded stance on the shares.
UBS also warned that Bytes remains exposed to changes in Microsoft’s partner economics at a time when hyperscalers are ramping capital expenditure and looking for ways to offset those costs elsewhere.
With Microsoft historically making meaningful incentive changes every few years, the bank sees a growing risk that reseller incentives could come under renewed pressure in 2027, creating another drag on growth for a business that sources about half of its gross profit from Microsoft.
AI was the other big concern as UBS argued that, for now, artificial intelligence is taking a share of enterprise IT budgets rather than expanding them in ways that benefit traditional software resellers. It pointed to evidence that spending on AI-native start-ups is rising quickly, while adoption of products such as Microsoft 365 Copilot remains at an early stage. Against that backdrop, UBS said AI currently looks more like a headwind than a near-term growth catalyst for Bytes.
Even after the stock’s sharp de-rating, UBS said Bytes’ valuation no longer looks compelling enough to justify a Buy rating. Its new 305p target compares with a downside case of 200p and an upside case of 375p.