A tech stock to buy to cash in on the AI revolution

This IT services specialist is a top performer overlooked by the market.

stock performance on phone
(Image credit: © Getty Images)

When buying and selling shares there is always a temptation to focus on the companies hitting the headlines.

However, sometimes the best trading returns don’t come from the most high-profile stocks but from the ones that simply put in a consistently strong performance year in, year out.

One of these is Computacenter (LSE: CCC), which has amassed an incredible streak of increasing adjusted per-share earnings for 18 years in a row.

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What’s more, the latest evidence, including a 28.5% increase in revenue in 2022, suggests the company has plenty of room to grow even further. Computacenter focuses on providing IT services to companies and governments, mostly in the UK, Germany and North America.

It receives roughly 80% of its gross revenue from technology sourcing, helping companies install networks and buy equipment (such as cables).

While this sector is dependable and profitable, Computacenter has recently started to place much more emphasis on other areas such as software and consultancy.

These markets offer higher margins and additional scope for growth, especially with companies now spending far more money on all aspects of their digital operations than they did before the pandemic.

Moving up the value chain

In addition to moving up the technology value chain, Computacenter is taking steps to expand its American operations, which now account for about 40% of its revenue.

Last year it acquired US technology group Business IT Sources (BITS) to boost its revenue in America’s Midwest, an area that has been traditionally underserved by technology sourcing and support companies, which tend to focus on the east and west coasts.

At the same time, it is expanding its operations in other markets such as India, which are also experiencing strong growth.

Overall, Computacenter has a strong track record, with sales growing by 70% over the past five years between 2017 and 2022.

It is expected to maintain this pace: revenue is expected to keep growing by roughly 10% a year over the next few years.

A high return on capital employed (ROCE, a key gauge of profitability) of between 18% and 25% in recent years has also helped to fund steady increases in the dividend, which is now more than double the level seen in 2017.

Despite this, the stock is more than reasonably valued, trading at 13 times expected 2024 earnings, with a solid dividend yield of 3.15%. As well as boasting strong fundamentals, Computacenter shares also look attractive from a technical perspective.

Like many tech shares it fell sharply, and at one point was down by 40% from its pandemic peak in September 2021. However, recently it has bounced back, rising by 23% over the past six months, and is now above both its 50-day and 200-day moving averages.

I therefore suggest that you go long at the current price of 2,264p, at £1 per 1p. In that case, I would set a stop loss of 1,364p, giving you a total potential downside of £900.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri