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FTSE 250 Index holder Soft cat (LSE:SCT) could be a great stock to buy to take advantage of the way the world is adapting to the use of technology in everyday life.
A clear personal example of this is that I had to fill out a lengthy form on my local council's website to request a new recycling bin. A few years ago, a simple phone call would have sufficed.
This is why I would be willing to buy some Softcat shares next time I have free funds.
<h2 class="wp-block-heading" id="h-technology-supplier”>technology provider
Softcat is a UK-based information technology infrastructure and services provider. Its core offering includes software licensing, workplace technology, cybersecurity, networking, and more. The company primarily focuses on public sector organizations as well as small and medium-sized businesses.
Interestingly, the shares have remained stagnant over a 12-month period. They are currently trading at 1,480 pence, compared to 1,482 pence at this time last year.
My investment case
Starting with the bearish scenario, I believe one of the main reasons why the stock price did not advance much last year is due to Softcat's core customer base. Public sector organizations are at the mercy of economic volatility. This turbulence can lead to budget cuts and revisions. In turn, spending on non-core technology can be reduced. As Softcat is highly dependent on this sector, earnings and returns could be affected in the future.
The other two issues I have are valuation and geographic coverage. Softcat shares are currently trading at a price-to-earnings ratio of 27. While 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 Priceswhich has broader coverage that could give you a competitive advantage.
Turning to the other side of the coin, it is hard to ignore Softcat's track record from a performance and share price perspective. The stock is up roughly 500% over the past decade. This has been driven by exceptional performance, growth and shareholder value.
While the past is no guarantee for the future, I believe there is still plenty of room for growth. For example, one could say that the public sector has been neglected from a digitalisation perspective in recent years. While I recognise the risk of budget cuts, many of the organisations with which Softcat has excellent relationships need to invest in IT solutions to catch up with the modern world. This could translate into increased profits and profitability for the company.
Furthermore, the emergence of artificial intelligence (ai) could be another way for Softcat to increase its coffers.
Finally, a 2.5% dividend yield sweetens the investment. However, I understand that dividends are never guaranteed.
My verdict
Despite the credible challenges, I believe the advantages outweigh the disadvantages. Softcat is the type of stock that has demonstrated a way to navigate difficult conditions, including a competitive industry, to grow and become an established force.
With a lot of growth potential, I believe Softcat's journey is far from over. Lucrative times could be ahead and I would love to buy some shares to enjoy the ride.
