Tech stocks got a lot of attention in early 2020. With the pandemic disrupting countless industries, the technology sector was largely immune to its effects. And subsequently, investors enjoyed substantial returns in a relatively short space of time.
Unsurprisingly, many of these tech stocks have been slammed lately with market volatility targeting businesses carrying lofty valuations. Kainos Group (LSE:KNOS) is no exception. Yet despite what the downward trajectory of its share price would suggest, investors may have overlooked the group’s solid progress. Let’s take a closer look.
A future leader in UK tech stocks?
I’ve explored this business before. But as a quick reminder, Kainos is an IT services firm with two main offerings. Its primary speciality lies within the digital transformation of existing enterprises. With companies and governments trying to improve operational efficiency through digitalisation, demand for the group’s services is on the rise. Some key customers include the NHS, as well as the Home Office.
The second division focuses on consulting and software solutions via the firm’s partnership with Workday. Through a single platform, clients can manage their employees, recruitment campaigns, and even financial accounts.
Since the start of 2022, Kainos, like many tech stocks, has been tumbling by double-digits – 25% to be precise. Yet looking at its latest interim results, the business seems to be thriving. Revenues are up by 33%, reaching £142.3m, and this, in turn, has pushed pre-tax profits to £24.8m.
With Covid-19 loosening its grip on the world, client budgets are getting less restrictive, placing Kainos in a seemingly favourable position, especially with a £250m order backlog. That, to me, makes the recent share price drop a potentially lucrative buying opportunity for my portfolio. Having said that, there are some risks to consider.
Taking a step back
As impressive as the top-line expansion has been, the growth rate of profits isn’t nearly as remarkable. With the pandemic slowly coming to an end, Kainos’s operating expenses are actually rising. That’s because the firm is reintroducing training and recruitment of new staff, as well as facilitating the return to the office. While that’s not surprising, margins are suffering for it, which has undoubtedly contributed to the downward momentum of its share price.
Putting the pandemic to one side, Kainos as a business is exposed to numerous ongoing threats. Cyberattacks are particularly troublesome for tech stocks, as sensitive client data is often being handled. Should the data moving through Kainos’s platforms become exposed, it could trigger severe reputational damage to the company, potentially leading to the loss of key customers. This is especially true for government agencies that, in my experience, tend to be more critical when it comes to digital security.
Time to buy?
Like most tech stocks, I wouldn’t be surprised to see further volatility ahead in the Kainos share price. However, in my opinion, the demand for digital transformation and optimisation isn’t disappearing anytime soon. And as it stands, this business appears to be a leader in the space. That’s why personally, I’m keen on adding some shares to my portfolio.