The rising risk of an artificial intelligence crash has dominated market discussions recently, with warnings of a bubble as valuations of AI-linked technology soar ever higher.
The chief concern is that AI will fail to deliver the transformative productivity gains expected, causing the huge levels of spending in the sector to dry up and share prices of tech stocks from the Magnificent Seven down to nosedive.
But regardless of any market reverse or correction, tech isn’t going away and investors remain keen to maintain their exposure to this important sector.
For investors who are content to have several of their tech eggs in the AI basket, but see the merit of building a diversified and broader based tech portfolio, even though an AI crash would likely hit most companies hard, there are myriad ways to do this.
Many companies have thrived even as their business models have been deemed at risk from AI, including big US names familiar to UK employers such as Salesforce and Workday.
In the UK, the tech sector has its own clusters of specialists, though they lack the scale of the US giants and have been thinned out through takeovers and take-privates.
These range from well-established software vendors such as Sage and Alfa Financial, consultancies including Kainos (a UK Workday supplier) and Craneware to highly focused niche firms such as genetics tester Oxford Nanopore and semiconductor manufacturer IQE. Finally, there are the services providers such as Computacenter, Bytes Technology, and Softcat.
This latter group manages the IT infrastructure needs of clients by selecting and installing hardware and software and keeping their systems secure. Growth is partly driven by the willingness of businesses to upgrade, and rising anxiety about cyber attacks. Softcat is the UK’s largest IT services provider, while Computacenter’s main markets are in the US and Germany.
BUY: Softcat (SCT)
Softcat is tapping into the commercial shift towards hybrid cloud systems, artificial intelligence, cyber security products and services, writes Mark Robinson.
In its full-year results, the group has highlighted “20 consecutive years of double-digit gross profit growth”. Gross invoiced income rose by 26.8 per cent to £3.62bn, with growth in the hardware segment particularly pronounced, but “broad-based” among its enterprise, mid-market and public sector customer channels. Gross profit grew by 18.3 per cent to £494mn, or by 16.5 per cent to £48,500 on a per customer basis.
Customer numbers have risen despite wider macroeconomic uncertainties and per capita profitability has been increasing in line with the longevity of Softcat’s relationship with its customers.
Softcat has continued to build market share, estimating that it serves approximately 20 per cent of the customers in its target market, which the group estimates to be worth £87bn in the UK and Ireland. FactSet gives consensus earnings per share of 71.6p, rising to 78.4p in full-year 2027.
SELL: Bloomsbury Publishing (BMY)
Publishers face a growing dilemma over whether to license their content to artificial intelligence companies, writes Valeria Martinez.
Such deals provide an immediate revenue stream, but could backfire if AI tools start replacing the need to visit news sites or buy books.
This summer, Bloomsbury Publishing joined the likes of Future and Informa’s academic publishing arm Taylor & Francis by signing its first AI licensing agreement for its academic backlist titles. The deal is a one-off, but its non-exclusive nature opens the door to additional licensing partnerships with other AI groups.
The AI tie-up helped first-half revenues in the academic division jump 20 per cent, with an improved 24 per cent margin, despite ongoing budget constraints from universities in the UK and the US. Management said the integration of US-based academic publisher Rowman & Littlefield is “substantially complete” with digitisation and royalties ongoing.
Still, group sales fell 11 per cent to £160mn due to tough comparatives in the consumer arm after last year’s surge from fantasy author Sarah J. Maas. Her book House of Flame and Shadow drove a sales frenzy in early 2024, but no title release is expected in the current financial year.
Even with the enduring popularity of J.K. Rowling’s Harry Potter series and the success of Katherine Rundell’s The Poisoned King helping fill some of the gap, consumer sales still fell almost 20 per cent during the half, with an even deeper profit slump. Overall, group profit before tax and highlighted items was down 10 per cent to £24mn, with a 15 per cent margin.
Yet management now expects to beat expectations for the full year, helped by the AI licensing boost. Following the upgrade, Peel Hunt has forecast 2026 pre-tax profits to rise by about 5 to 6 per cent. The balance sheet was also sound, with £2.4mn of net cash (excluding leases) after accelerated debt repayment on last year’s £65mn acquisition of Rowman & Littlefield.
Despite what looks like a reasonable valuation at 12.5 times forward earnings, Bloomsbury’s investment case remains unconvincing. As we flagged in our recent idea, the group has become increasingly reliant on a single fantasy author, leaving it exposed to shifts in consumer taste and the inevitable ebb and flow of blockbuster publishing.
On the academic side, the AI deal adds intrigue but little long-term visibility, while ongoing funding and budgetary pressures in universities keep us cautious. We think the shares look fully valued as things stand.
HOLD: Whitbread (WTB)
A drop in hotel and restaurant operator Whitbread’s headline numbers translated to a less than hospitable reaction from the market on interim results day, as the shares sank by 9 per cent, writes Erin Withey.
The FTSE 100 group reported a fall in both revenue and profit, reflecting largely flat accommodation sales at Premier Inn UK and a decline in its food and beverage arm.
One bright spot was the revaluation of its property portfolio, which put its value around £500mn higher than the previous gauge, according to Peel Hunt. Management expects to unlock £250mn-£300mn in property proceeds from disposals for the full year.
Elsewhere, the board reiterated its commitment to return more than £2bn to shareholders via buybacks and dividends by full-year 2030.
While the share price slide puts Whitbread on a fairly undemanding multiple of 14.9 times forward earnings, we remain wary. The company is taking a judicious approach to cost control, but the sale-and-leaseback model and subdued profitability guidance keeps us circumspect.
