National Bank Financial analyst Richard Tse and John Shao expect “in-line to soft” third-quarter results for Canadian technology companies, believing “a softening economic backdrop is slowing the cadence of spend, particularly in enterprise going into year-end.”
In a research report released Thursday, the analysts caution investors that valuations across the sector are not inexpensive, particularly given the difficult economic conditions. They note the S&P Info Tech index is trading approximately 1.3 standard deviations above its average dating back to January 1991 “in the face of heightened rates and what we believe to be forthcoming downward estimate revisions across the group given a softening economic backdrop.”
“Despite the past week, Technology has outperformed, albeit across a narrow group,” they said. “Year-to-date, the S&P Info Tech, NASDAQ 100 and S&P/TSX Info Tech indices are up 35.1 per cent, 32.3 per cent and 33.9 per cent respectively. In the U.S., that outperformance has been largely driven by the mega caps in NVDA, META, MSFT, GOOGL, AAPL, AMZN and TSLA. What’s interesting, in the context of our Canadian coverage universe, is that the S&P/TSX Info Tech Index has also outperformed, despite the absence of mega caps, in names like CLS, SHOP, CSU, GIB.a and OTEX. Like the U.S., it would appear the larger relative names have held up this group. And like the U.S., where the AI thematic has contributed to some of that lift in the pure-play/adjacent names, the other reason for the relative outperformance in those larger relative names has been a flight to relative ‘safety’ as that relative group holds growth along with common defensive attributes (profitability and recurring cash flow).”
The analysts recommend investors should continue to overweight in defensive larger cap names, pointing to Constellation Software Inc. ( “outperform” and $3,250 target), CGI Inc. (“outperform” and $175) and Open Text Corp. ( “outperform” and US$60). They also think a move to become “opportunistic (on a sector pullback) in growth names” is prudent, pointing to Altus Group Ltd. ( “outperform” and $65), Coveo Solutions Inc. ( “outperform” and $14), Docebo Inc. (“outperform” and US$50), Kinaxis Inc. (“outperform” and $250), Lightspeed Commerce Inc. (, “outperform” and US$20), Nuvei Corp. ( “outperform” and US$23) and Shopify Inc. (“outperform” and US$80).”
Mr. Tse made target changes to stocks in his coverage universe. They are:
* Farmers Edge Inc. ( “sector perform”) to 20 cents from $25. The average is 18 cents.
Analyst: “We see downside risk to Farmers Edge’s FQ3 results ... The appetite for technological deployment in farming remains challenged given that approximately 3/4 of respondents in the Farm Capital Investment Index Survey for September said they view this as a bad time to make large investments in their farm operation care of rising interest rates and the rise in prices for equipment and construction. ... All in, lack of execution, high burn, continued IP dispute and growing questions around the underlying business model results in considerable risk in this name.”
* Lightspeed Commerce Inc. ( “outperform”) to US$20 from US$23. The average is US$19.57.
Analyst: “We’re expecting in-line FQ2 (CQ3) results from Lightspeed based on conservatism built into Management’s guidance. That guidance implied little to no expansion in payment penetration and flat to negative quarter-over-quarter growth in GTV and total customer locations.”
* Nuvei Corp. (NVEI-Q/NVEI-T, “outperform”) to US$23 from US$27. The average is US$37.22.
Analyst: “We’re expecting in-line FQ3 results from Nuvei. ... We see an attractive risk-to-reward profile given a valuation of 7.5 times (EV/EBITDA F23) against expectations that we’ve reset considerably last quarter. In our view, we see upside to those conservative expectations. ... We continue to think Nuvei has differentiated itself by focusing on outsized growth segments with an la carte go-to-market while (more recently) expanding its TAM into larger enterprise merchants. In our view, the risk-to-reward profile is compelling.”