Best UK tech stocks to watch

What are UK tech stocks?

UK tech stocks are shares of companies based in the United Kingdom which operate in the technology industry. They operate in various subsectors, including software-as-a-service (SaaS), artificial intelligence (AI), fintech (financial technology), semiconductors, cybersecurity, telecommunications, and e-commerce.

While the country does enjoy a number of larger tech firms, the valuations don’t come anywhere close to the US. For example, the largest UK tech stock is arguably Wise with a market capitalisation under £10 billion — while the US enjoys multiple multi-trillion-dollar tech companies, including Nvidia, Microsoft and Apple.

However, this does mean the UK stocks may have much larger growth potential and often trade at lower price-to-earnings ratios making their valuations more attractive on a fundamental basis. Further, while the US companies tend to reinvest all profits into growth, several UK tech stocks like Sage or Softcat instead pay out regular dividends, which is attractive to passive income investors looking for exposure to the sector.

UK tech stocks — by dint of their smaller size — also tend to excel in a specific niche and are commonly spun out of world class universities including Oxford and Cambridge. This often makes them buyout targets for larger players once they scale to an appropriate size. In addition, for UK-based investors, they can be more tax efficient to invest in because while you will pay stamp duty there are no currency conversion costs.

On the other hand, there are some downsides. UK tech stocks are limited in scale, and the smaller companies can be thinly traded compared to the US giants. The companies are also competing with the US for both employees and capital, and due to their high capex requirements are highly sensitive to interest rates and fundraising sentiment.