Rolls-Royce and Lloyds shares have made investors a lot of money over the past three years. The former has surged 520% over this time while the bank stock has jumped by 157%, with dividends drizzled on top.
Year to date though, they’ve only increased by roughly 8%. This means they’ve performed about in line with the FTSE 100‘s return.
But one stock that’s absolutely trouncing Rolls-Royce, Lloyds and the index this year is Computacenter (LSE:CCC). It’s up by a whopping 79%, with the two-year return at about 130%!
What on earth has sent the Computacenter share price to the stratosphere? And might there be more gains to come?
Booming data centre demand
Long story short, shareholders can thank artificial intelligence (AI) for these stupendous gains. Computacenter provides IT hardware and services to other companies, including US hyperscalers and neocloud customers that are spending eyewatering sums on AI infrastructure.
Revenue has gone from £5bn in 2021 to £9.2bn last year. And with the committed product order backlog now at a record £12.6bn, City analysts see revenue reaching £16bn by 2027.
On Monday (26 October), the firm raised its full-year profit outlook, sending the share price soaring (again). It now expects adjusted pre-tax profit to be at least £425m versus the £387m previously pencilled in by analysts.
Earlier this year, the company also completed the acquisitions of AgreeYa and GAI in North America. Respectively, these broaden Computacenter’s professional services footprint and provide access to the lucrative US federal government market.
Gross margin compression
Now, one issue worth noting is that explosive growth in Technology Sourcing activity is dragging the firm’s overall gross margin lower. In H1, it fell from 12.6% to 9.6% as higher-margin professional services became a smaller piece of the pie.
Naturally, investors were willing to look past this when first-half operating profit almost doubled, from £82m to £153m. Diluted earnings per share did double (+103.7%).
So the growth really is spectacular right now.
What are the main risks?
There are two key risks here, in my opinion. One is that around 60% of group operating profit is derived from North America, creating an element of concentration risk. If AI spending suddenly slows across the pond, Computacenter’s future growth prospects would too.
The other risk is valuation, with the stock trading at around 19 times this year’s forecast earnings. That’s not outrageously expensive given the growth, but the multiple could contract sharply if growth slows or investors fret about global AI spending.
There’s also not much income on offer. After the share price surge, the forecast dividend yield is just 2%.
Has this ship sailed?
Weighing everything up, I don’t think it’s too late to consider the stock. As Nvidia CEO Jensen Huang said in August: “AI has reached its inflection point. It’s doing useful work. Its tokens are productive and profitable. Now, compute is revenue, and demand is accelerating… The AI infrastructure buildout is at full steam“.
Computacenter’s expanding order backlog backs this up. Crucially, the valuation doesn’t look extreme.
I already have plenty of AI-related stocks in my portfolio, but I think this FTSE 100 company deserves a closer look.
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Ben McPoland owns shares in Nvidia and Rolls-Royce.
