We discuss opportunities in UK technology stocks.
- Technological innovation is transforming our lives.
- Technological advances are generating enormous value creation and disruption across the global economy.
- The UK equity market is home to several world-leading technology companies which we think are underappreciated.
Technology is rapidly reshaping our lives. As consumers, we are digitising the way we shop, work, entertain ourselves, monitor our health and manage our finances. For businesses, the role of technology is rapidly shifting from being a driver of marginal efficiency to an enabler of growth and innovation. It allows companies to improve the customer journey, leverage data, increase agility, empower workforces and ultimately gain or retain market leadership. Technologies such as cloud computing, artificial intelligence and data analytics, alongside exponential gains in processing power, are creating strong multiplier effects.
These advances are generating enormous value creation and disruption across the global economy. According to a 2017 report by Huawei and Oxford Economics, over the preceding 15 years the digital economy grew two and half times faster than global GDP (gross domestic product).1 We believe this is unlikely to slow down. If anything, the Covid-19 pandemic has accelerated these trends, with the Microsoft CEO stating last year: “we’ve seen two years’ worth of digital transformation in two months”. In a recent survey, 85% of CEOs agreed their organisation’s digital transformation had significantly accelerated during the crisis.2
The UK is home to several world-leading technology companies
Reflecting the importance of technology to the global economy, the sector constitutes more than 20% of the global benchmark the FTSE All-World Index. However, an interesting feature of UK equity investing is that the technology sector only makes up around 2% of the FTSE All-Share Index. Does this mean that UK investors are missing out because of a dearth of opportunities? While the UK doesn’t yet have any sector giants, like Microsoft or Apple, it does have over 20 medium and small-sized technology companies in the FTSE All-Share Index, several of which are global leaders in their niche.
Huge addressable markets
Aveva and Sage, both software business which help their corporate customers digitise their processes, are two examples. Both firms were founded in the UK but have global customer bases. Aveva is a global leader in industrial software. Its origins are in specialist design software that helps engineers to construct complex industrial assets. More recently, Aveva has evolved its product offering to include software for ongoing operational management and it now covers all aspects of digital industrial asset management, captured by the concept of the ‘Digital Twin’, a digital representation of a physical object, process or service.
Aveva’s recent acquisition of OSISoft, which operates a data management platform for industrial operations, enhances its holistic offering further, by expanding the pool of data that drive its operational products. Aveva’s solutions enable customers to generate superior returns on assets as a result of reduced downtime, lower maintenance costs, reduced risk to workforce and lower carbon emissions. The firm’s total addressable market (TAM) is huge, with the path to digitisation in many industries being slow historically, as legacy IT can be difficult to adapt. Cloud delivery circumvents these challenges, and with the proliferation of sensors, data and increases in processing power, the limiting factors are considerably reduced, accelerating customer adoption.
Sage provides enterprise resource planning (ERP) software for small and medium-sized enterprises. Sage’s products range from very simple accounting and tax tools for micro-enterprises through to broad finance suites for medium-sized companies. The company has had challenges in the past, but in recent years it has refocused its product offering and now provides leading cloud products which have many advantages over traditional products, such as having lower upfront costs and being easier to integrate, with greater flexibility and more security. Sage’s cloud business is now growing rapidly and is a key driver for group revenue and cash-flow generation. With the market still sceptical of Sage owing to challenges in years gone past that are now resolved, we believe there is potential for significant upside should the company continue to deliver.
Investing in the technology sector is often associated with paying lofty valuation multiples, but in the UK we have highly innovative global leaders such as Aveva and Sage which fly under the radars of many and remain underappreciated in our opinion. Both trade at discounts to their global peers, while having attractive business models with recurring revenue, high profitability and strong cash-flow generation.
It is no exaggeration to say that technology innovation is revolutionising our lives. As an active UK equity investor, able to take high-conviction positions in companies we believe in for the long term, we aim to capitalise on this, regardless of the technology sector’s low weighting in the benchmark.
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice.