The UK stock market isn’t known for its tech stocks. In the FTSE 100 index, there are not many technology businesses. But what many people don’t realise is that in mid-cap and small-cap areas of the UK market, there are hundreds of exciting, high-growth technology companies. And many of these companies have delivered big returns for investors in recent years.
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.
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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.