Bytes Technology has been through a lot in recent years. In 2024, Neil Murphy left the CEO post after a scandal linked to undisclosed trades. Sam Mudd was appointed as the new CEO to clean up that mess, giving the nominative determinism enthusiasts yet another wonderful data point.
Then, in mid-2025, the stock shed nearly 30% of its value in a single day after shocking the market with a profit warning. You don’t see that kind of drop very often, especially not for a large company.
At the time of writing, the share price of around R97 is still a long way off the 2025 peaks of over R133 a share. But the current level is also a strong recovery from the 52-week low of R56.68 in April this year, a period during which the price plummeted in an environment of increasing risk-off sentiment due to geopolitical upheaval.
This is the kind of volatility you would expect to see from a mining company operating in a frontier market, not a tech business based in the UK.
Despite all the noise, the earnings multiple is trading at close to 20 times. That’s hardly cheap, especially compared to some of the other tech names on the JSE. Datatec and iOCO are trading at roughly 7, while Altron (Bytes’s former parent company) with its platform businesses is trading on 11.
Is the Bytes valuation being anchored by the high historical levels we saw at the company? Or is it warranted based on the progress made in fixing the business and setting it up for growth?
Build once and sell twice
Patience is certainly something that investors are being asked to exercise. Though gross invoiced income (GII) increased by 19.6% in the latest period, this metric isn’t as correlated with net profit as you might hope.
First, Bytes earns a gross profit that is linked to GII, but the relationship between those metrics can be significantly affected by a change to commission structures. Changes made by Microsoft to its commission structures have been a major challenge for Bytes, as the products of that tech giant contribute 52% of Bytes’s gross profit.
That is perhaps the biggest weakness in the Bytes model: it is primarily a sales desk rather than a product owner. Acquisitions along the way have attempted to address this gap, such as the newly announced acquisition of CyberOne in the UK that brings an accredited security operations centre to the business. But on the whole, Bytes has been the bridesmaid rather than the bride in the tech value chain.
This doesn’t mean that Bytes can’t run a successful business. It’s organised the business around a central thesis: build once and sell twice. It has a segmented route-to-market strategy that seems to be working: public sector gross profit grew by 23.1% in this period, while private sector gross profit was up by 14.6%.
This drove growth in group gross profit of 17.8%: a strong performance, but well below the 19.6% growth in GII.
But this growth has come at a cost. Administrative expenses jumped by 24.7%, with Bytes putting in place new sales incentive structures to encourage growth. This is why group operating profit increased by only 6.6%.
It’s worth noting that though total headcount at Bytes was up by only 1.7%, there’s been a change in the mix of roles. Front-line sales headcount increased by 4.4%, while technical delivery headcount was up by 17.4%. The reduction of support roles is doing wonders for gross profit per employee, an important metric.
But will it deliver strong profits for investors, rather than just an appealing top-line performance? Management has flagged that the cost pressures will be worse in the second half of this financial year, before calming down in financial 2028 and hopefully leading to positive operating leverage after that.
A further issue for the second half is that there’s a much tougher base for comparison. The public sector business grew gross profit by just 1.6% in the first half of 2026, so the latest interim period benefited from a soft base. But in the second half of 2026, public sector gross profit jumped by 13.9%, creating a greater hurdle for Bytes. The private sector business is a much easier story, as that segment was anaemic throughout the prior period.
Financial 2027 is clearly a transition year. Bytes is guiding a full-year performance of double-digit gross profit growth, yet only low- to mid-single-digit operating profit growth. If the fireworks are going to happen, they will be in financial 2028 onwards.
That’s a long time for investors to wait, particularly when Microsoft holds so much influence over the performance of half of the business. For now, at least, investors seem to be giving this management team the benefit of the doubt, as evidenced by that 20 times trailing multiple.
