Why has the NCC share price plummeted?

Today was a disappointing day for shareholders in the cyber security specialist NCC (LSE: NCC). NCC’s share price is down 35% in today’s trading as I write this on Friday afternoon. That means the stock has lost 46% of its value in the past 12 months.

What is happening – and can it give you a buying opportunity?

profit hazard

Share prices fell in response to a profit warning issued by the company this morning.

NCC has forecast an adjusted operating profit for this year of around £47m. However, the company told the market that it has since published its forecast, “market volatility has increased significantly and has had a significant impact on near-term cyber security revenues and profits, particularly in the North American and UK technology sectors.“.

As such, the company cut its profit forecast to £28m-£32m. It establishes a cost base and I expect that will lead to the initiation of several cost cutting initiatives. NCC also said it expects current demand challenges to continue into next year.

The canary in the coal mine

As a tech investor (although not in NCC), the details of this profit warning sent a tingle down my spine.

NCC cites some specific reasons that contribute to lower profit expectations and I think they have relevance beyond the company itself.

Tech companies are cutting staff which means buying decisions are now taking longer or being scrapped altogether. Turmoil in the banking sector has led to “reduced appetite to spend on technology projects between sectors“.

In other words, the banking crisis has led to a reassessment of spending technology far beyond the banks. The NCC also said that the increase in interest rates has led to more inflationary problems for customers.

When a company issues a profit warning, it is not uncommon to explain how bad the environment is so that investors don’t just focus on their own performance.

However, if NCC’s analysis is accurate, it suggests that we will soon see technology spending reduce the impact on profits across a wide range of software and hardware providers. When Computing center noted a positive note in today’s annual results, saying that “there are many challenges due to the macroeconomic environment“.

There may be a lot of profit danger around the corner in this sector, in my opinion.

NCC share price changes

Today’s dramatic fall shows the market isn’t happy with what it’s hearing from the NCC.

However, the company is consistently profitable and likely to remain so. Dividend yield at 4.7%. It has a sizeable customer base and strong long-term growth prospects.

In today’s session, the stock hit a 12-month low. As I write, they trade at a price-to-earnings ratio of 14. That is based on last year’s earnings and so the prospective ratio could be higher. But I don’t see it being expensive for a company that remains in growth mode in a business area I expect to see a lot of demand for decades.

I’m not ready to buy yet because I’ll wait until the demand gets worse. However, with NCC’s share price currently below the pound, the company is definitely on my watch list.