National Bank While increased volatility has emerged in the technology sector recently, National Bank Financial analyst Richard Tse and John Shao expect to see rising estimate revisions as many companies “continue to lean-in on capital allocation/efficiency discipline.”
“With Technology having paused its run over the past 4–6 week(s) under a growingly uncertain backdrop on the scale of interest rate cuts this year, calendar Q1 earnings season will be notable to setting up the rest of the year for the sector,” they said. “Adding to that, we believe flattening estimate revisions for the group ex mega cap U.S. Tech has given investors further pause given the backdrop. But that does not take away our enthusiasm for the sector looking out over the next 12 months; it merely underscores the importance of this coming earnings season in supporting that outlook.”
In a research report released Thursday titled Down but Not Out, the analysts emphasized “capital-efficient growth will prevail” across the sector despite the rate environment.
“When it comes to Technology, the market has made a hard pivot towards capital-efficient growth over the past year and in our view, the backdrop will continue to reward those names on a relative basis under the uncertain rate environment,” he said. “One such measure for capital-efficient growth has been The Rule of 40 (Rof40) which over the past year has seen a shift in weighting towards profitability with revenue growth still being notably important. For reference, every 10-per-cent increase in Rule of 40 translates to a 0.4 times multiple expansion. With that in mind, names executing at or close to the Rof40 are Constellation Software (47 per cent), Computer Modelling Group (88 per cent/46 per cent excluding acquisitions), Docebo (37 per cent) and Shopify (36 per cent) according to current consensus estimates on LSEG.”
Heading into earnings season, the analysts pointed out a pair of companies they see possessing potential upside from the results:
* Shopify Inc. (SHOP-T, “outperform” and US$100 target), believing “pickup in merchant growth additions and robust retail sales data equal upside to GMV & operating leverage potential.”
* Tecsys Inc. (TCS-T, “outperform” and $50 target), pointing to “consistent market share gains in healthcare.”