This report is provided for informational purposes only and should not be interpreted as providing investment advice nor making recommendations to readers.
UK tech stocks continue to find support at around COVID-19 pandemic-level lows, following the ruthless five-year bear market. Indeed, large cap software & services stocks have rebounded by ca.40% over the past five months, while tech hardware remains in focus following the global semi-conductor boom.
While the advancement of large language models (LLMs), combined with massive data centre investment, generated fears of reduced barriers to entry across the software industry, the reality is more complicated, as LLM tokens add a new cost line, and AI advancements add an entirely new level of complexity to business.
Meanwhile, our preferred investment strategy is to focus on potential recovery stocks with attractive valuations while staying clear of hyped-up stocks.
Trading updates continue to be positive, albeit at significantly lower levels than we saw in January through to April this year. This is in spite of the ongoing challenging economic and geopolitical backdrop. Going forward, the question is: can the market generate a similar typical strong first quarter as we move into 2027?
We continue to monitor trading updates and earnings announcements of UK tech-related stocks of all sizes, the vast majority of which are small caps. For the purpose of this analysis, our universe is broadly defined and includes IP-driven business across a range of sectors (excluding drug discovery). We monitored 43 companies’ statements over August, and ‒ based on commentary (including profit beats/misses, as well as new business wins and outlook statements) ‒ we estimate that ca.40% of these announcements resulted in improvements to the outlook for the individual businesses, compared with 26% that saw decreases.
We quantify these data, as shown in the graph below. On a trading or results announcement, we allocate a +1 for a beat and a -1 for a miss, with a similar process for the perceived outlook. The numbers are aggregated on a quarterly rolling basis, since many companies release trading news each quarter.
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