Deutsche Bank has upgraded two UK software stocks to 'buy' ratings, citing improving fundamentals and reduced concerns over artificial intelligence's impact on traditional IT services. The bank raised Cerillion and Bytes Technology Group to 'buy' from 'hold' and 'neutral' respectively, while downgrading Softcat to 'hold' despite lifting its price target.
The UK software and IT services sector has recovered about 42% since its late-March low, reflecting broader investor optimism. Cerillion, however, saw its shares decline roughly 27% over the past three months despite a strong operational performance. Deutsche Bank noted that the share price decline overstated concerns about the company's second-half-weighted financial year, while underlying fundamentals remained intact. The bank trimmed Cerillion's target price to 1,400 pence from 1,575 pence.
Cerillion reported a 100% increase in new orders to £39.6 million in the first half, while its back-order book rose 64% to a record £82.1 million. The company's total pipeline expanded to £271 million, supported by a £10-15 million revenue contribution expected from a recent Omantel contract, primarily driven by high-margin software licensing.
Bytes Technology Group was upgraded to 'buy' as Deutsche Bank highlighted its minimal hardware exposure and strong growth trajectory. The company's July AGM update indicated double-digit year-over-year growth in gross invoiced income and gross profit across both public and private sectors. Analysts viewed the company's guidance as conservative relative to consensus.
Softcat, meanwhile, saw its target price raised to 2,140 pence from 1,800 pence, but its rating was downgraded to 'hold' due to valuation concerns. The bank noted that Softcat's shares have surged about 50% year-to-date, with the stock trading at roughly 24 times calendar-2027 earnings, suggesting future upgrades are increasingly priced in.
Deutsche Bank's shift in sentiment reflects a broader easing of investor concerns over AI's impact on traditional software and IT services business models. Analysts noted that IT resellers are well-positioned to benefit from rising technology spending driven by AI adoption, particularly as Microsoft's FY27 partner incentives prioritize customer adoption, upselling, and cloud-workload growth over straightforward software-license sales.
