Investment in technology shares has become a focal point for investors in the UK, with some firms experiencing significant growth, while others have encountered challenges in their financial performance. Zaven Boyrazian, writing for The Motley Fool UK, has identified two technology shares that he believes are currently undervalued and present potential opportunities for growth before the end of 2025.
Despite a healthy recovery for certain stocks such as Barclays and Rolls-Royce, which have reported returns exceeding 60% in 2024, not all sectors have fared equally well. Particularly affected has been the UK IT infrastructure market, which has seen companies like Kainos Group (LSE:KNOS) and Computacenter (LSE:CCC) trading at historically low price-to-earnings multiples. This downturn, attributed to cyclical challenges, may be poised for recovery as 2025 approaches, coinciding with a forecasted rebound in IT and artificial intelligence (AI) spending.
The backdrop of shrinking budgets in both the public and private sectors has restrained investment in digitalisation efforts. Firms, including Kainos and Computacenter, have faced these financial pressures as companies rein in non-critical expenditures while awaiting political and economic stability. Kainos focuses primarily on software solutions, while Computacenter offers hardware services. Despite enduring demand for IT systems like networking and cybersecurity, both firms have seen diminished digitalisation spending as clients strive to cut costs. Consequently, Kainos's shares have dropped by 12% and Computacenter's by 19% over the last year, contrasting starkly with an 11% rise in the FTSE 100 index during the same timeframe.
However, analysts foresee potential changes on the horizon for 2025. As political uncertainty surrounding general elections dissipates and economic forecasts improve, there is optimism that digitalisation budgets will be restored. Interest rates are anticipated to fall, further indicating a stabilisation of economic conditions. Particularly noteworthy is the expectation of a significant increase in AI investment within the UK, with both Kainos and Computacenter well-positioned to benefit from this anticipated market shift. Other firms in the industry, such as Softcat, also acknowledge these trends, further signifying an industry-wide consensus on the recovery potential in the latter half of 2025.
While the timing of any recovery remains uncertain and dependent on broader market factors, analysts maintain that the underlying need for operational efficiency through technology will persist. Both Kainos and Computacenter have healthy cash reserves, providing them the capacity to weather the current market conditions. Boyrazian has indicated that he has already included Kainos in his investment portfolio and is considering adding Computacenter as well, reflecting growing confidence in these businesses as their long-term prospects improve.
As the technology landscape evolves, the performance of these firms in the coming year will likely be scrutinized, especially as they navigate a potentially changing economic environment. Investors will be watching closely to see whether the expected resurgence of digitalisation investments and AI spending materialises as forecasted.
Source: Noah Wire Services