Scotia Capital’s Kevin Krishnaratne said he sees several enticing investment options in the Canadian technology sector with many equities trading at “attractive valuations.”
In a research report released Wednesday titled Lots of Good Opportunities in 2024, but Timing Is Everything, the analyst said he’s “cautiously optimistic” about software spending trends for the year ahead and also sees “positive views” on fintech and payments companies given consumer resiliency.
“We enter the year cautiously optimistic on software, with a view that the initial outlook for software as a service (SaaS) firms will likely be conservative,” he said. “Fieldwork conducted by Scotiabank GBM’s U.S. Software Equity Research team (link) suggests that 2023′s major IT budget cost optimizations are behind us and signs of stabilization are more apparent. Early reads from earnings season last week also support our views. SAP’s 2024 outlook anticipates accelerating cloud revenue growth but a still-subdued macro environment. ServiceNow characterized the demand environment as “tough” and saw no change vs. trends in Q3.
“Last week’s prints from the card networks (Visa, Amex) suggest consumer-spending resiliency through Q4, with online strength. Black Friday Cyber Monday (BFCM) was a record with better-than-expected growth, and December U.S. retail sales figures per the Commerce Department beat. While Visa observed some transitory softness in January in-person U.S. spending trends and several categories continue to be challenged (home & garden, sporting goods), we still think the outlook is unchanged (and positive) for the U.S. consumer in 2024.”
The analyst made these target changes:
- Altus Group Ltd. ( “sector perform”) to $50 from $48. Average: $51.83.
- Coveo Solutions Inc. (, “sector outperform”) to $14 from $13. Average: $13.05.
- Kinaxis Inc. ( “sector outperform”) to $220 from $200. Average: $217.78.
- Nuvei Corp. ( “sector outperform”) to US$35 from US$30. Average: US$35.54.
- The Descartes Systems Group Inc. ( “sector outperform”) to US$95 from US$86. Average: US$90.80.
“Prudence in positioning ahead of Q4 earnings, 2024 guide: We are most constructive on (1) Descartes, as despite the robust valuation (10. times C25E EV/sales) we like the leverage to supply chain & logistics and its organic growth in the high-single digits alongside strong adj. EBITDA margins (mid-40 per cent ), with upside from M&A; (2) Open Text as a ‘defensive pick’ given the undemanding valuation (7.1 times C25E EV/EBITDA) and its exposure to key verticals such as cybersecurity and supply chains, with upside from AI (not in current guidance); and (3) Nuvei, which we think is set up for a Q4 beat given our view that guidance is conservative while online trends to close out the year were better than expected, at an attractive valuation (6.8 times C25E EV/EBITDA). We remain Sector Perform on Shopify but believe it can produce a Q4 beat given its BFCM outperformance and increasing focus on AI, cost optimizations and operating leverage,” he said.
“We expect in-line quarters and 2024 outlooks for (1) Docebo on macro softness impacting IT budgets, though we see multiple levers poised to drive upside as the year progresses (government initiatives, AI-product releases, new large enterprise logo wins), and a clear path to exit 2024 with a Rule of 40 profile; and (2) Lightspeed, which reports its seasonally strong Q3 (December) and for which management has communicated macro/gross transaction volume (GTV) spending caution given exposure to several highly discretionary, in-person retail/restaurant categories.”