Why I believe it's time to buy these two top tech stocks
Moneysupermarket.Com(LSE: MONY) might not have the same international reputation as US tech giants Amazon.com and Facebook, but I believe that this is one of the UK's top tech stocks.
Devoted to helping consumers save money, its brands, which include MoneySuperMarket, MoneySavingExpert and TravelSupermarket, are some of the most recognised in the UK when it comes to financial services. This recognition, coupled with rising demand for its comparison offering, has helped the group grow net profit at a compound annual rate of 26% over the past six years. And despite the historical growth rate, shares in the company trade at a forward P/E of only 16.5 today, a valuation that in my view, seems to undervalue Moneysupermarket and its prospects.
According to a trading update issued by the firm today, revenue for the first quarter expanded by 4%, thanks to high demand for energy switching services.
Not only is it growing rapidly, but it is also hugely profitable. Last year the firm's operating profit margin came in at 29% and return on capital employed, a measure of profit for every £1 invested in the business, was 54%, making it one of the most productive companies listed on the London market.
CEO Mark Lewis is making the most of the capital generation, deploying funds for acquisitions and returning the rest to investors via dividends.
Last month the group forked out £40m to buy Decision Technologies, a B2B comparison site that supplies white label technology for a wide array of price comparison websites. As well as this deal, Moneysupermarket is investing in its own capabilities via the expansion of its engineering hub in Manchester.
These efforts should help the company maintain its growth rate and edge over the market. The stock also supports a dividend yield of 3.9%, making it not only attractive as a growth play but as an income investment as well.
Bid on the cards?
Gocompare.Com(LSE: GOCO) is my other favourite tech pick. Over the past few years, Gocompare has chalked up an annual earnings growth rate of just 5.9%, which looks terrible in comparison to that of Moneysupermarket. However, what I'm excited about is the group's growth potential as it has been investing heavily in recent years, buying up other businesses and funding growth at others.
For example, at the end of last year, the company acquired MyVoucherCodes for £36.5m, its first full acquisition in its 11-year history. This deal followed investments in robo-advisor MortgageGym and UAE-based comparison site SouqAlmal. City analysts believe these deals will boost earnings per share by 37% in 2018, and management is looking for other acquisitions to complement this growth.
There is also the chance that the company could become a bid target. Indeed, last year ZPG, the owner of property portal Zoopla, tried and failed to pay £460m (110p per share) for the GoCompare business, and I wouldn't rule out another approach as GoCompare builds its online business. Management estimates its online properties will attract more than 100m views this year.
Overall, considering the above, I believe GoCompare's current valuation of 13.9 times forward earnings undervalues the business and its prospects.
Rupert Hargreaves owns no share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Facebook. The Motley Fool UK has recommended Moneysupermarket.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.