Stockpickers: Bytes Technology, YouGov, Softcat

Much of the excitement around the AI boom has been concentrated on hardware providers (the likes of Nvidia and TSMC) and large language model developers (OpenAI and Anthropic).

The technology has been recognised as a major transformational force, but for the computing hyperscalers such as Alphabet, Microsoft and Amazon Web Services, the time for marvelling is over — they now need to recoup the billions of dollars invested in AI infrastructure and generative AI capability. Their priority is increasing the rate of adoption among the public and private sectors.

Broker Peel Hunt believes AI will push long-term spending on technology from about 10 per cent of operational expenditure budgets to between 20 and 30 per cent. Government and corporate technology spending is already rising as organisations recognise that AI’s value goes far beyond merely automating mundane tasks.

But while they see the advantages of, say, agentic AI or transitioning to the cloud, many are wary of choosing the wrong solution.

They therefore have a powerful incentive to turn to “resellers”, such as Bytes Technology and Softcat, which help businesses integrate the latest technology into their operations, identify use cases, deal with licensing matters and manage cyber security.

Resellers can solve all of these problems while providing a bridge for the hyperscalers that cannot easily reach these customers.

Both Bytes and Softcat cater to the private and public sectors. Bytes, for example, helped deploy Microsoft 365 Copilot to half a million NHS staff, with the aim of enabling them to spend less time on administration and more time delivering patient care.

Resellers’ relationships with their customers are likely to be long-term and secure, while, as Peel Hunt notes, the reseller model is durable because each new technology shift adds complexity and more customer budget.

BUY: Bytes Technology (BYIT) 439p

IT services reseller Bytes Technology has doubled down on its relationship with Microsoft by acquiring UK cyber security company CyberOne, writes Arthur Sants.

Around half of Bytes’ business already came from reselling Microsoft products, and it has added to this with the £19.4mn acquisition of a company that has “a strong position within the Microsoft security ecosystem”.

In the six months to August 31, Bytes’ gross invoiced income increased by 19.6 per cent.

Broker Investec is not worried about Bytes’ dependence on Microsoft and believes the CyberOne deal will leave Bytes “ideally positioned to help clients maximise their Microsoft estate usage” and will “propel” its fast-growing services business.

With a forward free cash flow yield of 6 per cent, its valuation is hardly demanding, and given the scale of AI investment, Microsoft will be desperate for someone to sell its products.

HOLD: YouGov (YOU) 296p

YouGov believes its market valuation is disconnected from its intrinsic value, so it has decided to implement a £15mn buyback, writes Mark Robinson.

Trading improved markedly in the second half of the year. And the analytics technology group also saw accrued benefits from its ongoing value-delivery plan, which aims to simplify YouGov’s business structure while trimming support function costs.

For all the operational progress, adjusted operating profit still fell by 11 per cent to £54.3mn on a 200 basis-point reduction in the related margin. But the shift in momentum means that management is guiding for growth of 7 to 12 per cent in full-year 2027.

Further implementation of efficiency savings can’t come quickly enough. A promising end to the year, but the forward rating of 8.9 times is in line with the peer median.

BUY: Softcat (SCT) 1,764p

In the year to July 31, IT services group Softcat’s hardware gross invoiced income increased by 41.6 per cent to £1.4bn, as its customers spent more on data centres and networking infrastructure.

Meanwhile, companies have responded to the growing cyber threat posed by AI by spending more on security, with Softcat citing “strength” in cyber security licensing as a reason for the 25 per cent growth in software income.

The company recently acquired US-based IT services provider GDT for £785mn.

Broker Peel Hunt is confident in the GDT deal and believes spending across AI and cyber security will continue to rise as the increasingly complex digital landscape will push customers to “lean more on Softcat”.

The shares trade at 19 times forward earnings, which is below their historical valuation. Softcat looks good value as long as the AI tailwinds keep blowing.