Despite the Canadian technology sector being increasingly volatile in recent weeks after “many years of outperformance,” Desjardins Securities Kevin Krishnaratne feels attractive potential remain for investors.
“While we recognize the potential for near-term pressure on the tech trade on rising yields, sector rotation and the flow of funds from growth to value, we see many investment opportunities across a number of subsectors,” he said. “Furthermore, although valuations in tech, which had been rising pre-pandemic and saw further boosts in 2020, appear to have investors on edge now more than ever, we still see Canadian tech at a discount to most U.S. peers. Meanwhile, many of the names in our coverage enter 2021 in a position of financial strength with healthy balance sheets and streamlined cost structures, which we see as poised to deliver strong free cash flow.”
In a research report, Mr. Krishnaratne initiated coverage of the sector with eight companies while resuming coverage of four other stocks.
“We have a positive bias on the IT services sector, with many global systems integrators and technology providers pointing to strength in the back half of 2021” he said. “With cloud adoption at just 20 per cent of enterprise workloads and software at 13 per cent of overall IT spend, we see multiple years of growth for IT service providers and technology enablers. Within media tech, we see opportunities related to the digitization of the ad industry as consumers seek content anytime, anyplace, and increasingly on mobile. Global advertising looks poised to rebound in 2021 on the economic recovery, which we believe can be a positive driver for related stocks. E-commerce & payments is another area where we see opportunities for upside, even as global economies reopen. While we recognize that online shopping trends may normalize as lockdowns ease, the shift toward omnichannel retail, where commerce is enabled everywhere, is here to stay, with brick-and-mortar businesses increasingly leveraging technology such as commerce platforms and payments processing/point-of-sale solutions.”
Mr. Krishnaratne gave “buy” ratings to 11 of the 12 stocks in his coverage universe. They are:
* Absolute Software Corp. with a US$20 target. The average on the Street is US$18.75.
* AcuityAds Holdings Inc. with a $30 target. Average: $27.59.
* BBTV Holdings Inc. with a $19 target. Average: $20.40.
* CGI Inc. with a $120 target. Average: $109.23.
* Converge Technology Solutions Corp. with a $10.50 target. Average: $8.49.
* Haivision Systems Inc. with a $12.50 target. Average: $13.50.
* Martello Technologies Group Inc. (MTLO-X) with a 35-cent target. Average: 50 cents.
* mdf commerce inc. ) with a $21 target. Average: $17.90.
* Photon Control Inc. with a $3.50 target. Average: $3.63.
* Quisitive Technology Solutions Inc. (QUIS-X) with a $1.75 target. Average: $1.51.
* Stingray Group Inc. with a $9 target. Average: $8.79.
Mr. Krishnaratne gave Alithya Group Inc. a “hold” recommendation with a $3.25 target, which falls 3 cents below the consensus.
“Some of our favourite names that trade at attractive valuations, feature healthy balance sheets, have demonstrated strong FCF growth trends and are exposed to high-growth areas of IT include CGI Group and Converge Technology Solutions,” he said. “We see Photon Control as an intriguing way to play the current semiconductor cycle, which is being driven by big themes such as the cloud, 5G and AI. Absolute Software is aligned with cybersecurity trends that we see becoming ever more important as enterprises enable ‘work from anywhere’ offices.
“For investors seeking exposure to high-growth industries, we believe both AcuityAds and BBTV Holdings provide opportunities to participate in the rapid shift to digital ad spending, with trends poised to accelerate as cord-cutting drives increased usage in connected TV and video platforms such as YouTube. While Quisitive does trade at a premium to peers on its core IT services business, we still see upside in the stock on optionality for its LedgerPay product which looks well-positioned to disrupt the brick-and-mortar retail payments space.”