Tech stocks have been quite a lucrative sector to invest in recently. With most of them largely immune to pandemic disruptions, strong technology businesses have been able to thrive. But as a consequence, these stocks tend to trade at quite a high premium.
Yet today, I’ve stumbled across one UK company that recently became cheaper and could also be primed for explosive growth over the long term. Could this be one of the best UK tech stocks to buy for 2022? Let’s explore.
A rising star in automated online marketing
The tech stock is dotDigital (LSE:DOTD). This software-as-a-service business provides a data-driven marketing automation cloud platform. It enables advertisers to reach the right audience across various channels, including social media, text messages and email.
The platform analyses a firm’s user data to generate personalised marketing content that’s more likely to resonate with them. This has allowed dotDigital to achieve pretty impressive conversion rates on its produced content versus other marketing platforms. So I’m not surprised to see the share price rise by over 300% over the last five years.
But, yesterday, management released its full-fiscal year results for 2021, ending in June. And it doesn’t look like investors were too happy, since shares are down 20%. Although it’s worth mentioning that the 12-month return still stands at an impressive 38%. So what happened?
Despite what yesterday’s volatility indicates, the report actually looked quite encouraging, in my opinion. Total contract income grew by 23% to £58.1m, with monthly average revenue per customer rising from £1,083 to £1,251. Although still a small part of the business, its international operations in Asia also reported a 47% boost in sales.
Combining this growth with the deepening relationships among leading ecommerce platforms, including Shopify, BigCommerce, and Magento, the business continues to impress me. And with yesterday’s sell-off, the valuation is now at a much more attractive price. That potentially makes it one of the best tech stocks to buy for 2022, in my opinion.
Understanding the risk
Rapid sell-off’s can often be a buying opportunity. But it’s important to understand what caused it. In the case of dotDigital, there seem to be some simmering concerns surrounding its gross margins. These fell from 92% last year to 82%. That’s still nothing to scoff at, but a 10% decline is something of a red flag.
Upon closer inspection, the issue lies with its text messaging marketing channel. The company routes all sent messages through third parties who charge on a per-message basis. These fees have subsequently increased, causing profitability to suffer.
With a vast collection of competing marketing platforms, raising prices to offset these increased costs doesn’t look like a lever the company wants to use. In other words, gross margin is likely to stay at this lower level moving forward, unless it can find a cheaper text message router.
The best tech stock to buy now?
As an existing shareholder, the drop in gross margins is frustrating, but it doesn’t worry me that much. From what I can tell, the business is still thriving, and the market has simply over-reacted on the news. That’s why I believe this is one of the best tech stocks to buy now for my portfolio.