More National Bank After a “humbling” 2022 for technology stocks that saw “a valuation resetting across the board,” National Bank Financial analysts Richard Tse and John Shao now see “a compelling
opportunity for long-term outperformance,” believing a “blanket resetting” in valuation has “overly penalized some names.”
“What’s clear to us is that avoiding this sector comes at the peril of potentially missing meaningful outsized returns relative to the market,” they said. “In our opinion, the group is quietly being spooled up to be unleashed when the market conditions (particularly rates) come to an inflection. Just consider the volatile moves we saw (even) in 2022 when glimmers of rate relief spawned material runs in the sector such as the 23-per-centmove in the S&P Info Tech Index from June 16 to August 15 as signs of slowing economic growth fueled optimism for rate relief. This is why we think investors should start sharpening their pencils for that eventuality. That said, the market has become more discerning which is why we continue to believe that names executing on their strategy with the added variable of showing a credible path to (near-term) profitable growth will be notable names to own through 2023.”
“Given the continued uncertainty in the market today, we’re sticking with a ‘barbell’ approach that includes opportunities in both defensive names while opportunistically building positions in “high torque” names that have the potential for a snapback given a mispricing to the underlying fundamentals as we look out longer term.”
In a research report released Friday previewing 2023 for the sector, valuations remain “inflated under the current sentiment” and warn further downward estimate revisions may be inevitable.
“While we know 2022 was a painful year for tech investors, we remain optimistic,” they added. “In 08/09, multiples for many high torque names contracted meaningfully, with names like Taleo and NetSuite seeing their multiples contract by 90 per cent or more. Yet, within two years following their troughs, many of those former High-Flying names saw their multiples reflate meaningfully, with some like Salesforce, DemandTec and RightNow surpassing their previous peak multiples. Given that precedent, we’d expect some of our names to benefit from multiple expansion as the economic backdrop eventually improves. To be clear, we’re not saying that they’ll return to their 2021 peak multiples anytime soon; that said, much like in 2022, where we saw a reversion to the mean (downwards) and potentially an overshoot to the downside, there’s potential we’ll see the opposite effect (multiple expansion) in H2′23 to realign (more closely) with historical averages.”
“Looking ahead, while EBITDA growth is a notable factor that we expect to drive outsized returns in Tech throughout 2023, there are several others including market positioning (i.e., leader in respective industry), target market (e.g., we expect B2B to be more resilient than B2C), execution on the fundamental business strategy, and relative valuations. Bottom line, much like 2022, we expect 2023 to remain a year of stock selection.”
With that view, the analysts made their top picks for 2023. They are:
‘High Torque (Potential) Technology Pick’
Lightspeed Commerce Inc. with an “outperform” rating and US$40 target. Average: $30.29.
Mr. Tse: “In our view, the selloff in Lightspeed has been overdone particularly for a Company growing 30 per cent year-over-year while operating at near breakeven with a viable path to profitability. At the time of writing, LSPD is trading at 1.7 times calendar 2023 sales, 4.1 times below its peers across POS, Payments, eCommerce, and High Growth North American SaaS companies and well below its historical average NTM EV/S [next 12-month enterprise value to sales] multiple of 12.1 times. In terms of the Company’s path to profitability, LSPD has a number of levers to pull to gain operating efficiencies including (1) savings from the consolidation of its platform into its flagship Hospitality and Retail offerings where there’s a potential to benefit from the freeing up of 30 per cent of its engineering resources currently dedicated to its legacy offerings; (2) flagship products decreasing onboarding time and training costs; and (3) growing scale that is expected to offer better terms for payments and hosting costs.”