Facebook IPO Spotlights US Tech, but Canadian Techs are More Profitable

ByronBerry — Byron Capital analyst Byron Berry compared Canadian hardware and software stocks to their US counterparts, and found the Canadians were trading at a significant discount, despite better earnings.

Social media juggernaut Facebook today filed its IPO papers. The offering, which will be underwritten by Morgan Stanley, JPMorgan Chase and Goldman Sachs, amongst others, will value the company at nearly $100 billion, making it the largest internet IPO ever.

The company’s form S-1 registration reveals, predictably, that revenue and profit have been climbing for years at the Menlo Park based social-networking service.

Facebook’s recorded 2011 revenues of $3.71 billion after posting $1.97 billion in revenue in 2010, and $777 million in 2009. Facebook earned more than $1 billion last year.

With Facebook as the crown jewel of social media IPOs, following comparative lesser-lights Groupon and Linkedin, there is no doubt that, for the first time in more than a decade, tech is hot again.

In the United States, that is.

In a note to clients this morning, Byron Capital analyst Byron Berry pointed out that Canadian techs are not sharing in the resurgence. In fact, he says, the low valuations of Canadian techs are a major reason M&A activity in the sector is booming, as larger, often US based companies are forcing the hands on Canadian boards with offers that are above the market price, but may still be bargains.

Berry says despite having higher EBIT margins and EPS growth than their US counterparts, Canadian tech companies are valued at a 23% discount to their American peers in the software sector and at a 34% discount in the Hardware sector.

Berry compared a basket of twelve of Canada’s tech leaders in the hardware space, including Sandvine (TSX:SVC), Glentel (TSX:GLN) Aastra (TSX:AAH), Axia NetMedia (TSX:AXX) and Vecima Networks (TSX:VCM), against a group of 156 US securities. He found the average five year diluted EPS growth was 77% in Canada versus 49% in the United States.

The Byron analyst then did the same with software, comparing Canadian stalwarts like Softchoice (TSX:SO), Descartes (TSX:DSG), Enghouse Systems (TSX:ESL), and Absolute Software (TSX:ABT), where he found the average five year growth to be 34% versus just 23% for a basket of 124 US securities.