Recent high-profile advances in Artificial intelligence (AI), such as the launch of ChatGPT a year ago, have certainly captured the imagination of companies and consumers. Few can doubt that, in time, it will transform business and our everyday lives. For investors there is a clearly an opportunity – but there is also great uncertainty. Which companies will be the winners and losers in this new technological age?
In many ways the recent rise of AI is comparable to the dotcom boom of the late 1990s. Back then everyone could see that the Internet was going to transform business, but picking out which individual companies would become global titans was somewhat harder. For every success story such as Amazon or Google, there were countless failures. Does anyone remember Pets.com, World.com or Boo.com?
At Henderson Smaller Companies we are in no doubt that AI will be a major part of the future economy, but we also take a considered view. We want to profit from the technological changes taking place – but we are rather less interested in ‘taking a punt’ on AI. Our approach has always been to favour established, profitable companies with good growth prospects.
For most companies, taking advantage of AI will require getting the basics right. This means investing in datacentres and IT systems that can keep pace with the latest technological developments.
The companies that provide these systems and services are the ‘picks and shovels’ companies in the latest tech goldrush. Whatever direction the AI revolution takes, you can be sure of one thing: companies that provide core IT services will be major beneficiaries.
This approach has, quite literally, paid dividends; three of our top technology holdings have delivered outstanding returns to the Henderson Smaller Companies Investment Trust. All three of these British stocks are profitable, growing and cash-positive businesses that have seen their capital value rise and delivered increased dividends in their most recent results.
Computacenter, one of our top 20 holdings, is a British success story founded more than 40 years ago. Now a multinational operation, with 40% of its revenues coming from the US, Computacenter provides IT infrastructure to companies that should help them be in the position to integrate AI services and has an unrivalled record in delivering capital growth and income. For the first half of this year the group reported a 27% rise in revenues, improved cashflow and a 13.9% increase in adjusted pre-tax profits.1 Dividends were also up, and the company said it was committed to returning 10% of its market capitalisation to shareholders.
Attractive cash positions and progressive dividend policies are also features of our other two top tech holdings, Softcat and Bytes Technology. In their latest financial results, both groups cited the advance of AI as a significant driver for their future growth.
Softcat said the impact of AI was ‘building rapidly’ particularly for data centre technology – as large and accessible data stores are the foundation of all AI systems. The company’s operating profits were up for the year extending an unbroken track record of year-on-year growth since listing in 2015 and it not only increased its ordinary dividend, but also announced a further special dividend.2
Meanwhile, Bytes Technology Group, specialises in cybersecurity and cloud computing. Its latest half year results showed revenues up 16.3%, operating profits up 12.1% and cash assets up 44%. Its half-year dividend was up too, by 12.5%.
Bytes Technology is also expecting AI to be a significant driver of future growth. It has a long-standing relationship with Microsoft, which launched its AI assistant, CoPilot, for enterprise customers in November and will roll it out to smaller companies in 2024.3
Between them this trio of tech firms covers a wide range of client markets. But all three exhibit the key qualities that we look for in any business – proven track record, profitability, a strong cash position and good growth prospects.
These tech holdings are, of course, part of a diverse range of investments held by HSL, but we think they prove our point. The full and precise impact of the AI revolution on business is still unknown, but that does not mean staking a claim in the future needs to be a gamble.
[1] Half-year Report – 07:00:04 08 Sep 2023 – CCC News article | London Stock Exchange
[2] Final Results – 07:00:08 24 Oct 2023 – SCT News article | London Stock Exchange
[3] Final Results – 07:00:08 24 Oct 2023 – SCT News article | London Stock Exchange
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