Stifel's Coverage of Tech Sector - G&M Stifel analyst Suthan Sukumar resumed coverage of Canada’s technology sector with a long-term bullish view, seeing fundamentals “as strong as ever.”
“We acknowledge that tech multiples remain robust, alongside an uncertain market backdrop with risk of an inflationary and rising rate environment, compounded by new variant/lockdown fears,” he said in a research report. “That said, market valuations are heightened across the board, so we view a bet against tech as a bet against growth, and believe there is still under-appreciation for the durability of secular trends in the sector. Thus, while valuations may be volatile in the near term, we think the ‘rate of change’ is a more important factor for interest rates, and believe growth will ultimately outperform.”
“In 2021, there are now significantly more companies within the S&P 500 trading ABOVE 10 times Sales than at the Tech Bubble peak nearly 20 years ago. However, we would argue that this time is different. This is not a Technology Bubble, it is an EVERYTHING BUBBLE. Of the equities now trading above 10-times revenue, fewer than half are traditional Tech. So while, like everything else, Technology valuations are high relative to historical averages, to be negative on Technology equities at this time is to be negative on risk assets of all kinds. That said, as we have entered a new phase of the current inflationary shock, there is risk that Central Banks are about to take the punch bowl away. In that scenario, Technology equities may be vulnerable to valuation contraction, but likely no more than broader risky assets.”
Mr. Sukumar thinks we are entering a “trillion dollar digital transformation shaping the next decade of key themes and trends in enterprise and consumer tech.”
“While 2020 and 2021 saw strong growth on the pull-forward of demand post the pandemic, we believe 2022 will highlight the permanency and durability of these demand trends as tech spend continues to accelerate across key areas of digitization, including cloud, cyber, supply chains, and hybrid work,” he said. “This has been reflected in our industry conversations, with companies highlighting greater pipeline visibility, sales productivity, and overall confidence in operational execution ahead. As such, we have conviction that fundamentals in the sector will remain resilient, given strong, sustaining demand, fueling strong structural growth for secular winners, which could lead to potential for continued outperformance vs. guidance/expectations ahead.”
With that view, he resumed coverage of a quartet of Enterprise Software and Services stocks on Friday.
In order of preference, they are:
* Docebo Inc. (
/
) with a “buy” rating and US$100 target. The average on the Street is US$89.77.
“Our Top Pick, Docebo is a disruptive SaaS-based corporate e-learning platform with an expanding TAM opportunity as hybrid work becomes a new reality in the enterprise,” he said. “We see a strong, durable growth outlook with improving operating leverage, with further upside from greater contribution from the early-days partner ecosystem and an emerging cross-sell opportunity, given the launch of a new extended product suite. We see a compelling risk/reward with shares trading at 10 times fiscal 2023 estimated Sales, vs. comparable high-growth US SaaS at 17 times.”
* Kinaxis Inc. (
) with a “buy” rating and $235 target. Average: $225.80.
“Kinaxis is a best-of-breed SaaS platform for supply chain management,” he said. “Despite a significant blue-chip customer base, the company is still early days in penetrating a large and growing TAM as global supply chain disruptions fuel an accelerated demand environment. With revenue set to re-accelerate next year, we see Kinaxis returning to a top-tier growth and margin profile. We see a reasonable risk/reward with shares trading at 11 times F23E Sales, vs. comparable high-growth, high-margin U.S. SaaS peers at 14 times.”
* Tecsys Inc. (
) with a “buy” rating and $162 target. Average:$65.40.
“Tecsys is a SaaS-based supply chain management platform that is setting up for an accelerated growth outlook on the back of pent-up investment in supply chain digitization,” he said. “We like the company’s market leadership in the underpenetrated healthcare and complex distribution end-verticals, and see a compelling valuation re-rate opportunity as the company executes on its SaaS model transition, which will drive greater revenue visibility and margin expansion. We see an attractive risk/reward with shares trading at 5 times calendar 2023 estimates Sales, vs. software peers at 10 times.”
* CGI Inc. (
) with a “buy” rating and $125 target. Average: $127.64.
“CGI is the most defensive name in our coverage, with sticky long-term contracts, a robust backlog, strong balance sheet and FCF profile, and a proven ability to manage costs in any environment,” he said. “We see a setup for stronger organic growth, given accelerating demand for IT services. A new focus on more aggressive M&A provides further upside. Valuation is attractive at 16 times calendar 2023 estimated P/E, vs peers at 18 times.”