National Bank recommendations Avoid tech stocks at your peril is the advice from National Bank Financial, which delivered on Thursday its Technology Year Ahead 2023 report. Analysts Richard Tse and John Shao offered up a handful of picks for investors to consider for the upcoming year, one which should deliver double-digit returns and more for a number of Canadian tech names.
Where do we go from here? That’s the question after a particularly brutal 2022 for tech stocks, as the market hammered companies left and right. Calling it a “humbling” year, Tse and Shao contend that there could be more pain ahead, particularly since estimates across the tech sector have only recently started to be revised downward, a trend which could continue within the current macro business environment.
“While our view is that the downward estimate revisions will continue, adding risk to our coverage names, history shows the NASDAQ 100 (Tech) bottoming well before NTM EPS estimates in both the Great Financial Crisis of 08/09 as well as the COVID crash, as investors looked through to the other side of the downturn,” the analysts wrote.
Thus, investors may want to get ready to return to a select number of stocks, picking names that have shown an ability to deliver on earnings. Tse and Shao said it’s likely that what drives outsized returns this year — once the economic backdrop becomes more conductive to high-beta names — will be demonstrating a strong EBITDA margin profile.
At the same time, the analysts pointed to one thematic element, Artificial Intelligence (AI), as likely to play an outsized role in who does well in 2023. The analysts said that although AI has been proffered as the ‘next big thing’ for years, the technology is finally coming into its own due centrally to its ubiquity — AI is no longer available just to the bigger companies but has found a place in the budgets and workflows of even small businesses. Tse and Shao said the use of AI in augmented work such as robotic process automation software will become more prevalent.
“In our view, given the soft macro backdrop/outlook (e.g., high inflation, labour shortage), we expect businesses will prioritize investments in tech to boost employee satisfaction by allowing them to focus on more meaningful tasks (i.e., less tedious/redundant tasks) while concurrently driving labour efficiencies to expand/preserve margins,” the analysts wrote.
Tse and Shao said while they remain bullish on NBF’s staple “Outperform”-rated stocks like CGI, Constellation Software, Kinaxis and Shopify, the following six are their notable picks, as they appear to show a stronger disconnect between the fundamental outlook of their respective businesses and their current valuations.
Tse and Shao’s “Large-Cap Technology Pick” is Canadian enterprise information management company OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials NASDAQ:OTEX), which saw a material pullback in 2022 as a result of uncertainty surrounding the pending acquisition of UK-based Micro Focus.
But the analysts have faith in OpenText’s well-proven ability to quickly de-lever acquisitions, while they also see a lot of organic and inorganic growth not captured in the stock’s current price.
“Bottom line, investors following our research will know OTEX remains one of our favourite ‘legacy’ names. It’s also one we’ve been touting as notable in the current environment. Profitability and strong recurring cash flow offer investors compelling defensive attributes,” they wrote.
Under the category of High Torque (Potential) Technology Pick, Tse and Shao like e-commerce platform Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials NYSE:LSPD), saying the selloff in LSPD over the past year and more has been overdone, particularly seeing as the company is growing at about a 30 per cent year-over-year clip while operating at near breakeven and with a viable path to profitability, to boot.
The analysts said although Lightspeed’s exposure to retail presents a potential headwind in the current climate, the company’s links to the hospitality sector may alleviate some of that pressure, while its Payments business has good opportunity for growth.
“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,” Tse and Shao wrote.
Under the category of “Niche Technology Player Picks,” the analysts nominated digital experience solutions provider Coveo Solutions (Coveo Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CVO), saying the company has consistently exceeded profitability targets, has accelerated its operating model to profitability and has a solid record of driving significant ROI for its marquee enterprise customers. Tse and Shao expect demand for the company’s Relevance platform to stay strong as companies continue to see the benefits of personalized customer experiences.
“Bottom line, we continue to believe Coveo’s validated technology, experienced growth Management, marquee customers and partner roster combined with a robust organic growth rate (+25 per cent) and accelerated path to profitability make it compelling at 3.1x EV/S,” they wrote.
Learning management systems provider Docebo (Docebo Stock Quote, Charts, News, Analysts, Financials NASDAQ:DCBO) also gets the nod from NBF, with Tse and Shao saying the underlying fundamentals of the business as well as the size of its customers continues to highlight Docebo’s growing market share, showing that the company’s growth over the pandemic was more than just a COVID-related blip.
Tse and Shao forecast DCBO to have the highest EBITDA growth in 2023 for any name under their coverage list.
“If you’ve been following our research, you’ll recall that Docebo has differentiated itself from competitors with its platform’s breadth that can be deployed internally and externally. Notably, Management emphasized that external training remains the majority (2/3) of North America’s ~$8 billion LMS TAM. Perhaps more important is that 70 per cent+ of that external training market is Greenfield,” Tse and Shao wrote.
The analysts also picked cybersecurity name Magnet Forensics (Magnet Forensics Stock Quote, Charts, News, Analysts, Financials TSX:MAGT), saying that despite the recent share price rally, the company’s meaningful growth drivers will continue to be themes in 2023, with multiple market tailwinds supporting growth for the company.
“In terms of the public sector, we see the adoption of MDIS as well as the continued transition to a recurring term license model drive the other leg of growth for the Company. While the sales cycle of the MDIS products tend to be longer given the strategic nature of their deployment, we do see a steady progress in the upselling,” they said.
Finally, Tse and Shao picked IT solutions provider Softchoice (Softchoice Stock Quote, Charts, News, Analysts, Financials TSX:SFTC), saying the company has the defensive attributes to post strong relative outperformance in 2023. They praised Softchoice’s asset-light business model while also touting the company’s skillset in IT asset management.
“We like Softchoice for its large addressable market, strong partner relationships and a simple, but efficient, go-to-market strategy,” Tse and Shao said.
Note: all projected returns listed below are as of the publication date of the National Bank report.
Stock: OpenText
NBF Rating: Outperform
NBF Target Price: US$60.00
Projected 12-month return: 87 per cent
Stock: Lightspeed Commerce
NBF Rating: Outperform
NBF Target Price: US$40.00
Projected 12-month return: 149 per cent
Stock: Coveo Solutions
NBF Rating: Outperform
NBF Target Price: $11.00
Projected 12-month return: 32 per cent
Stock: Docebo
NBF Rating: Outperform
NBF Target Price: US$60.00
Projected 12-month return: 78 per cent
Stock: Magnet Forensics
NBF Rating: Outperform
NBF Target Price: $50.00
Projected 12-month return: 30 per cent
Stock: Softchoice
NBF Rating: Outperform
NBF Target Price: $28.00
Projected 12-month return: 55 per cent