FTSE 250 incumbent Softcat (LSE: SCT) could be a great stock for me to buy to capitalise on the way the world is adapting to use technology in day-to-day life.
A prime personal example of this is me having to fill out a long-winded form on my local council website to request a replacement recycling bin. Some years ago, a simple phone call would have done the trick.
Here’s why I’d be willing to buy some Softcat shares when I next have some free funds.
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Technology supplier
Softcat is a UK-based information technology infrastructure and service provider. Its main offering includes software licensing, workplace tech, cybersecurity, networking, and more. The business primarily focuses on public sector organisations, as well as small to medium-sized enterprises.
Interestingly, the shares have remained stagnant over a 12-month period. They’re currently trading for 1,480p, compared to 1,482p at this time last year.
My investment case
Starting with the bear case, I reckon a big reason for the share price not progressing much this past year is due to Softcat’s core customer base. Public sector organisations are at the mercy of economic volatility. This turbulence can prompt budget cuts and reviews. In turn, non-essential tech spending can be curtailed. As Softcat heavily relies on this sector, earnings and returns could be hurt moving forward.
The other two issues I have are valuation and geographic coverage. Softcat shares currently trade on a price-to-earnings ratio of 27. Although high valuations are the norm for tech stocks, could growth already be priced in here? As for coverage, all of Softcat’s revenue is derived from the UK, which is different to competitors like Kainos, which has wider coverage that could give it a competitive edge.
Moving to the other side of the coin, it’s hard to ignore Softcat’s track record from a performance and share price perspective. The shares have risen approximately 500% in the past decade. This has been due to exceptional performance, growth, and shareholder value.
Although the past isn’t a guarantee of the future, I still think there’s lots of room to grow. For example, the public sector has arguably been neglected from a digitalisation perspective in recent years. While I appreciate the risk of budgetary cuts, many of the organisations Softcat has excellent relationships with do need to spend on IT solutions to get up to speed with the modern world. This could translate into boosted earnings and returns for the business.
Furthermore, the emergence of artificial intelligence (AI) could be another avenue for Softcat to boost the coffers.
Finally, a dividend yield of 2.5% sweetens the investment case. However, I do understand that dividends are never guaranteed.
My verdict
Despite credible challenges, I reckon the pros outweigh the cons. Softcat is the type of stock that has shown a way to navigate tricky conditions, including a competitive sector, to grow and become an established force.
With the potential for lots of growth, I reckon Softcat’s journey is far from complete. There could be some lucrative times ahead, and I’d love to buy some shares to enjoy the ride.
