UK tech stocks don’t receive the same attention as their American cousins, but exciting developments are taking place. The stock picks below consider the growth prospects of firms that investors should be aware of.
The criteria defining tech stocks have widened over time. It reflects how more firms have embraced technology and how software-based products have become more widely adopted across society.
The Best UK Tech Stocks – A Shortlist
Our analysis takes into account how each firm is coping with the new economic environment and looks under the hood using fundamental analysis. Skyrocketing demand for solutions in areas like automation, cybersecurity, and fintech, means there are plenty of opportunities for investors to make returns.
The sector’s core remains those firms producing or servicing items ranging from semiconductors to innovative software. The companies can have ground-breaking proprietary technology that can make life-changing sums of money for shareholders.
Buying tech stocks has been made much easier by – technology. Online brokers have revolutionised the industry and made tech stock investing cost-effective and user-friendly. The more challenging part of the process is stock selection.
To help with that, AskTraders has compiled a list of the best UK-listed tech stocks by researching their potential for revenue growth. Some scrutiny is needed because if the exciting projects in the pipeline don’t materialise, the share price can be expected to tumble.
Sage Group PLC (LON: SGE)
Sage Group was founded in 1981, so it is far from being the small start-up the tech sector is often known for. It shouldn’t be overlooked, though, as the company’s well-established accountancy software products make it ideal for anyone considering buying just one UK tech stock.
Its client base is multinational and comprises small- to medium-sized firms that pay regular subscriptions. Given the challenges associated with changing systems, many existing Sage clients can be expected to suck up price rises rather than switch to an alternative. That’s crucial in an inflationary environment and points to the firm having a reliable income stream.
The SGE share price had traded in a sideways channel for several years before breaking out in mid 2023. We had flagged this one as one to watch when the price was down at a lowly 525p in 2021, and while it took the stock a little time to deliver, deliver it did. Comfortably trading above 1000p after breaking out to new highs of 1285p, this may be more of a dividend play with slower appreciation than in the past, but remains one to watch.
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Kainos Group PLC (LON: KNOS)
Belfast-based Kainos provides IT consulting and software services to businesses, governments, and healthcare providers. The company has over 250 commercial clients, including household names like Netflix, HP, Booking.com, and Diageo. Its customers in the public sector include the UK Home Office, the Ministry of Justice, and the NHS.
Compared to other UK tech stocks, Kainos has relatively low beta. There is enough volatility to keep investors interested, but once it gains momentum, as it did between 2019 and 2022, it plots a relatively steady course.
There was a lot of earlier excitement in KNOS that has cooled in the past 12 months. As you can see in the 5 year chart below, the ATH of more than 2,000p hit back in late 2021 is clearly in the rear-view. The last year of trading has largely been between the range of 900p to 1,250p with the stock being ‘rejected’ at that resistance line twice so far.
If the stock looks to break out, the move could be attractive, but you will want to wait for the right opportunity. In the meantime, the firm does pay a dividend above 2%, so this is a multi-faceted option.
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Softcat (LON: SCT)
FTSE 250 firm Softcat is an IT infrastructure provider founded in 1993, and based out of Marlow. The company provides bespoke end-to-end technology solutions for businesses going through a digital transformation.
Softcat is a ‘picks and shovels’ style firm. Its core revenues come from cloud computing, data centres, network and cybersecurity services. That resulted in it being severely hit when investors experienced a loss of appetite for tech stocks in 2022. The share price fell in value by more than 50% in less than 12 months.
Trading a pullback strategy offers a route to buy Softcat during the current dip. The stock remains more than 20% up on a YTD basis, and buying into long term strength on a pullback can be a solid general play.
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Darktrace PLC (LON: DARK)
Darktrace PLC is a tech firm which develops high-quality AI-based security software. Founded in 2013, the firm has offices in Cambridge (UK) and San Francisco (US) and a global client base, including prestigious firms such as Airbus, Siemens and Allianz.
It provides end-to-end IT security, with the software packages it sells being broken down by function and termed, prevent, detect, respond, and heal. That rounded approach allows Darktrace to offer everything a client might want regarding cybersecurity. As with Sage, that means it’s able to increase charges to clients who are reluctant to go through the challenges of finding an alternative provider.
The price chart for Darktrace shows how DARK shares experience price spikes during periods of geopolitical uncertainty. If you think there is an increased risk of military conflict in the world and that a new battlefield will be established online, then buying Darktrace is also a hedge against other stocks tanking should that happen.
Over the past 12 months, the stock has added more than 60%, with the recent issues surrounding CrowdStrike (a competitor) causing a nice spike. This has been on our UK tech stock lists for the past couple of years, and it remains worthy of a spot.
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Wise PLC (LON: WISE)
Wise shares have underperformed in a relation to the broader market since their launch. With the stock down 25% in 3 years it would be easy to dismiss WISE, but that may not be the wisest move.
The firm was launched in 2011 and first listed on the LSE in 2021, but more importantly for investors, it has been profitable since 2017.
We flagged the early start to a mini-rally in Wise, formerly known as TransferWise back in Q3 of 2022, and since that point the stock has doubled. The fundamentals also look good. The firm has over 10 million customers using its app to hold and convert over 50 currencies with no hidden fees.
Now in a period of retracement which started in March of this year, the share price is down more than 25% from 52 week highs. Watching for a sign of a breakout, or a positive fundamental catalyst may allow you to ride this one higher, but as always, there is a note of caution. Trends have stuck around on the stock for extended periods in the past, so watch out for a fake-out breakout and ensure you get confirmation of a retest of support.
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Why Invest in UK Tech
After a recent review of UK practices, reforms were recommended, encouraging more tech stocks to list on the London Stock Exchange. That could produce a long overdue buzz about the UK tech investment sector.
Technological innovation is continuing to grow at a rapid pace. While tech listings in other regions, such as the US, have increased substantially over the years, the UK has lagged, with companies reluctant to list in London due to regulations.
With the LSE improving its offering, there is even more potential to find a tech stock which makes the incredible returns associated with market legends such as Apple, Microsoft, and Tesla.
The key price driver to look out for is scalability. Tech firms such as Microsoft, which made many investors rich, were able to increase their revenue stream at a far faster rate than their cost base. Once Microsoft had developed its products, each additional licence sold incurred minimal extra expense.
Classic stock valuation models consider scalability and use predicted future revenues to calculate what the share price should be today. As some tech firms could potentially be generating exponentially greater revenues in just one or two years, they often have high price-to-earnings (P/E) ratios.
What to Know Before Investing in The Tech Sector
Of course, like all investments, there are risks, but the tech sector tends to experience excessive peaks and troughs. The Dot.com bubble of the late 1990s and the tech sell-off of 2022 are prime examples of the price volatility investors might face.
The rollercoaster ride offered by tech stocks comes down to their future revenues being hard to predict. There is an understandable degree of uncertainty when estimating how popular a new product might be. Even established products face the risk of being challenged by insurgent competitors.
Macro factors also have to be considered. The shift by the world economy into a more inflationary environment erodes the value of any future earnings; that hit share prices throughout 2022. High inflation can also mean high-interest rates, and many tech companies have high debt levels, which look likely to become increasingly expensive to service.
Tech stocks are at the riskier end of the investment spectrum, but the potential they offer means they can be justified in any portfolio. One way of managing the inherent risks is to make sure you have a tried and tested strategy.
