Softcat (LSE: SCT) fell heavily today (24 October) after releasing its full-year results. As I type, shares of the FTSE 250 IT infrastructure company had fallen 14% to 1,206p.
Does this share price setback represent a buying opportunity for my ISA? Let’s see.
Strong organic growth
For the year to the end of July, the IT reseller’s revenue decreased 8.6% year on year to £985m. That was below market expectations.
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However, operating profit still rose 3.5% to £141m. And despite a challenging macro backdrop, the firm managed to attract new customers, delivering 1.9% growth in the customer base.
That’s encouraging, as around 95% of its income comes from selling deeper into its existing customer base. In fact, there was strong double-digit gross profit per customer growth during the year.
Plus, a final dividend of 17p was declared, resulting in a full-year total of 25p, up 4.6%. And a 12.6p special dividend was maintained.
Why have the shares tanked?
Softcat normally delivers earnings outperformance. This can be seen in the share price, which is still up 331% since November 2015, even after today’s decline.
But management is only expecting FY24 operating profit to be in line with market expectations.
Also, it’s guiding for most of its growth to come in the second half of the year. That might have spooked some investors.
Cloud opportunity or threat?
Softcat was founded in 1993 under its original business name Software Catalogue (hence the distinctive name). It gives a nice feel for what the business does — it resells software to customers.
Now, the shift from on-premise IT to the cloud is clearly a massive multi-decade trend. However, could this migration pose a long-term risk to the company’s growth?
Once most customers are up and running in the cloud, I’d assume they could just get software directly from there. Could Softcat find itself being cut out as the middleman between technology vendors and end-users? This is something I’ve been considering for a while.
Actually, UBS analysts also wondered about this threat earlier in the year. The bank said: “We see additional long-term risks to margins from the shift to the cloud and the rise of cloud-based marketplaces where customers can directly procure software.”
That said, UBS is a lone bear. All other analysts are currently positive on the stock. And Softcat has its fingers in a few pies beyond just software and cloud. It sells various solutions and hardware, for example.
But this is something investors might want to dig into a bit more before considering an investment.
My view
To be clear, I think the firm has abundant opportunities to expand as digitalisation, cloud and cybersecurity all grow in importance and complexity. There’s big international growth potential too. And surely many customers will need help integrating generative AI solutions.
Valuation is also attractive, I feel, with the shares now trading on a P/E ratio of 22. Not outrageous for a tech stock.
Still, I don’t feel the stock is in bargain territory, with growth slowing. And my portfolio is already packed out with digitalisation themes.
But I’m still torn. The London stock market needs more Softcats, so I want the technology firm/stock to succeed. But I’ll be cheering from the stands, as I target other growth stocks to invest in.
