When Bytes Technology posted its annual results last week, attention focused on the FTSE 250 software company’s admission that it was “saddened as well as shocked” about its former boss executing undisclosed trades of shares worth £1.6 million.
Beyond the scandal over Neil Murphy’s 130 secret trades, however, were some interesting numbers. The software and hardware reseller posted double-digit growth in gross profit for the year to March, and built up £89 million in cash, thanks to “very strong demand for software and IT services” from both corporate and public sector clients.
Supplying businesses with laptops and software licences is proving lucrative at a time when firms face ever-growing requirements to maintain and secure their IT networks.
Murphy has resigned and the case is being investigated, but with the shares down 13 per cent at 515p since the shock announcements, now is a good time to buy into the industry.
The same is true for Bytes’s larger rival, Softcat. This Buckinghamshire-based firm is now Britain’s largest technology reseller, buying products from “original equipment manufacturers”, plus cloud providers and software publishers, and selling them on to businesses. Almost two-thirds of Softcat’s business is software, including 23 per cent from Microsoft, and its brief trading update in November highlighted “broad-based” demand from customers; when it reports first-half results on Tuesday, it’s likely to show the same sort of rising sales enjoyed by Bytes.
Yet shares in Softcat are changing hands at about £15 each, the same price as last summer, when the outlook is now much brighter. “IT spending is expected to increase in 2024, as economic conditions improve and digital transformation in its various guises continues to be high on organisational agendas,” said Martin O’Sullivan, an analyst at broker Shore Capital. He pointed out that laptops purchased at the start of Covid, four years ago, will soon be due for replacement, and names an £18 price target.
Both Bytes Technology and Softcat will also benefit from a huge investment wave in artificial intelligence, with clients needing to upgrade IT infrastructure to run AI applications and platforms. The extra security requirements around this vast haul of data will also push up demand for security software.
“This will benefit Softcat, being a main channel to the SME market for most of the leading security software vendors,” pointed out Investec. The recent release of Microsoft’s generative AI tool, 365 Copilot, for example, demands double investment as it requires Microsoft’s Windows 11 to run, further stoking software revenues at the resellers.
This hasn’t gone unnoticed: Softcat is trading on a price-to-earnings ratio of 23 for 2025, albeit down from 27 last year; at Bytes, it’s 24 for 2025, also down from 27. Bytes is growing faster, but it has only an interim chief executive at the moment. Still, the shares of both companies should soar as they continue their successful strategy of cross-selling products to existing customers, as well as winning new ones.
The businesses were resilient last year as higher wages and travel costs nibbled into margins; now, as companies invest in technology led by AI and cybersecurity needs, Softcat and Bytes offer a route to jump into the tech goldrush. Buy.
