I’ve had my fingers a little burnt since buying FTSE 250 tech share Softcat (LSE:SCT) in January. It’s fallen sharply in recent months, on worries over how artificial intelligence (AI) models will disrupt the software sector. The company was already on the back foot as tough conditions hit broader tech spending, hitting revenue growth.
Over 12 months, Softcat’s share price is down 24%. But I remain optimistic it will be a brilliant buy over the long term. In fact, I’m hoping the recovery could have started — it’s up 8% today (18 March) after releasing excellent half-year numbers.
Is it time for value investors to look closely at the stock?
Forecasts lifted
Softcat offers a wide range of solutions to businesses including cybersecurity, networking, cloud computing and AI. This way, it can provide integrated end-to-end IT services, which makes it a one-stop-shop that strengthens customer relationships.
On Wednesday it illustrated the strength of this model even during tougher market downturns. How? It lifted its full-year profit forecasts after announcing an “exceptional first half performance.”
Gross invoiced income leapt 33% during the six months to January, coming in at £2bn. Underlying operating profit grew 27% as a result to £93.8m. Both came in ahead of estimates.
Softcat said the result reflected “strong, broad-based performance and the contribution from larger solutions projects,” combined with “a pull forward of some customer orders due to memory shortages.”
As a consequence, the firm now expects “high single-digit growth in underlying operating profit” for the full year. It had previously tipped growth of low single-digits.
AI boost
What’s especially interesting is that Softcat seems to be effectively harnessing the AI boom rather than suffering from it. Graham Charlton commented today that AI actually “opens up significant business model transformation opportunities.”
He added that “these trends play directly to our strengths, with AI increasing customer demand across storage and compute, through the network and onto devices, as well as creating the need for greater security and governance.”
The tech specialist‘s acquisition of Oakland last April has significantly boosted its expertise and opportunities in this area. With its exceptional cash generation, Softcat has the chance to boost its position here with further acquisitions and investment in staff (headcount jumped 10.5% in the first half).
Are Softcat shares worth a look?
Even after today’s recovery, Softcat’s share price still offers excellent value. Its price-to-earnings (P/E) ratio sits at 16.6, well below the 10-year average of 27–28.
The share still faces danger given the uncertain economic outlook and signs of rising inflation. It’s also important to remember we’re at the early stages of AI. Who will be the beneficiaries and who will be victims of this new frontier still remains largely unknown.
But Softcat’s strong start and strength elsewhere suggests it’s still a top stock to consider. And especially at today’s knock-down price.
