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A number of UK stocks are similar Barclays again Rolls-Royce they are set to explode by 2024, rising 60% or more. However, not all stocks have been so lucky. In some cases, a tax return is appropriate as the underlying business is struggling to stay afloat. But for others, short-term headwinds have dragged prices down into the commodity zone.
That seems to be the case in the UK IT infrastructure sector. Companies like The Kainos Group (LSE:KNOS) and Computacenter (LSE:CCC) are now trading at historically low multiples as the sector has been slowing through 2024. However, this downward cycle may end soon. And when paired with the expected doubling in IT and AI usage next year, 2025 could be a welcome return to double-digit revenue and income growth.
What is happening with digitalization?
As economic conditions have worsened in recent years, budgets in all public and private sectors have been cut. Companies and government agencies have been tightening non-essential spending, awaiting political and economic clarity. And that’s the headwind both Kainos and Computacenter have had to endure.
Both companies specialize in helping customers automate and digitize operations, with Kainos leaning more on the software side of the equation, while Computacenter is more focused on hardware. Demand for IT systems, such as networking and Internet security, remains strong. And the built-in Kainos plugins work well for Work day platform and are still enjoying increasing demand from customers.
However, beyond this, the use of digitalization is not strong as customers focus on reducing costs where possible. As a result, apart from some bright spots in earnings, the overall performance of Kainos and Computacenter in 2024 was not good. And as a result, the shares of these IT companies have fallen by 12% and 19% in the last 12 months, respectively. In comparison, the FTSE 100 grew by about 11% in the same period.
A chance for change in 2025?
While the current performance leaves a lot to be desired, that may change next year. The political uncertainty since the early general election and subsequent October Budget is now over. Interest rates are expected to continue to decline through 2025. And as forecasts for economic growth look increasingly optimistic, digitalization spending may be set to return to positive territory.
In particular, the use of UK AI is expected to increase significantly. Both Kainos and Computacenter are positioning themselves to capitalize on this tailwind. It is a practice that some peers like Softcat they also point out, raising industry-wide expectations for higher growth in the second half of 2025 and beyond.
Obviously, there is no guarantee of an exact time for this cycle reversal. And investors may have to wait longer than expected if AI expectations fail to materialize next year. However, the long-term need for technological excellence is unlikely to disappear anytime soon. And with enough cash on their balance sheets, Kainos and Computacenter look more than capable of waiting out the storm.
That’s why I’ve already added Kainos to my portfolio, and I’m seriously considering adding Computacenter as well.
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