Nordic IT-services sector - Rapid growth of the last decade set to continue?

I am one of our analysts (Inderes) covering the IT-services sector in Finland, currently following Witted and Loihde. The sector has seen rapid growth, especially in the new IT-services segment (CAGR ~10 %), during the last ten years. In Finland, the amount of listed IT-services companies has now grown already to 12 firms in total. In the sector, there are many interesting firms in my opinion at the current valuation levels. Companies like Gofore and Siili Solutions have been few of the best performing stocks measured by the total return during their listed history. Both firms for example have created a great amount of shareholder value by organic and inorganic revenue growth combined with solid profitability while aiming to be the best workplace for their employees. Year by year they have been winning market share from the traditional actors while expanding into new customer sectors and services.

Here are some operating metrics of the companies from our coverage. During the last 3 years the revenue growth has been rapid with median growth being 12 % annually (CAGR). Profitability levels have also been solid during 2020 & 2021 and we expect some dip in the adjusted operating margins compared to these years as the general economic situation weakens. Cost structures were also a little bit lighter during the Covid-time as the firms had less travel expenses etc.

The valuation of the sector in general is currently quite moderate considering the long term potential of the companies and low capital intensity. The short term outlook is windy which justifies moderate valuation levels but in the long run the world is going to require more and more lines of code written. The competition for talent will continue raging also in the coming years and the constraints for new entrants will probably remain low which decreases the justified valuation levels. In my opinion, despite the weaker short-term outlook, with current valuation levels the sector offers a great opportunity to invest in the growth pockets of the economy with limited technology-risk.

Here in the latest Innofactor extensive report we have described the market in depth (~15 pages) for those of you who are interested to read more. This is the high level division of the market in our view.

Here is our summary of the Q2-results in the sector by @joni.gronqvist .

We are also looking to do an in-depth case study of the listed Nordic IT-services market. In the Nordic peer group we are currently including Bouvet, Enea, KnowIT and Netcompany outside of Finnish companies. Are there other Nordic firms which we should include in the Nordic peer group?

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I love this sector, solid long term growth, cash flow and stable profitability with limited tech hype and no bullshit artists. I have pretty big weight in the sector in my portfolio with Gofore being biggest, a great company. Most latest addition is Loihde, not the sector star but 0,2x sales for a profitable company seems just undervalued, I have time to wait for the valuation to reverse towards sector levels even if it takes a few years.

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Thanx a million for @Frans-Mikael_Rostedt and @mikaelrautanen for your input!

Det som jag gillar med sektorn är definitivt den låga kapitalintensiteten och de återkommande, jämna kassaströmmarna, samt det som även ovan nämndes: den, i jämförelse låga teknoligirisken. Har personligen haft svårt att skilja bolagen åt -. ni får ursäkta en som gärna vill ha det så tydligt som möjligt, men som med allt annat: den som orkar läsa på, (vi har material :slight_smile: !) kan även skilja agnarna från vetet. Min personliga åsikt är den, att det kan finnas många vinnare i denna bransch, men i längden måste man kunna leverera fortsatt mervärde till kund. Den som levererar kan även höja priserna.

Efter Q2’22 gjorde vi en djupdykning i sektorn tillsammans med @joni.gronqvist

Långt avsnitt, men fyllt med guldkorn för alla som orkar lyssna till slut. Förutom en allmän genomgång av branschen tittade vi även närmare på de olika bolagen och deras specifika kompetensområden och kundgrupper. Ta en kopp kaffe och lyssna :slight_smile: : på svenska.

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Siili Solutions was mentioned earlier in this thread. I really recommend the newest extensive research + video (in Swe) below:

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