If you can get past its recent malaise, investors should do well by Canada’s tech sector in the long run, says National Bank Financial’s Richard Tse, who argues that even though valuations may look rich, tech’s prospects still look good.
The recent pullback in technology stocks is clearly evident in the leading group of US-based FAANG companies, most of which are dealing with downward momentum that’s being chalked up to international trade tensions on the one hand and concerns over impending regulation on the other. Companies like Apple, Google and Netflix have seen their upward growth halted, while Facebook’s share price has gone back into negative territory for the year.
The somber mood had the tech-heavy NASDAQ down 2.3 per cent last week, while the Canadian TSX Info Tech index was also down 2.6 per cent.
But Tse says that despite the recent pullback, tech still has a multi-year runway ahead of it.
“As we’ve highlighted earlier this year, we continue to like the prospects for the sector as we see technology becoming an increasing competitive advantage for enterprise, particularly given the accelerating pace of disruptive technologies from AI to blockchain,” says Tse in an industry bulletin last week. “Our diligence would suggest enterprises are still playing ‘catch up’ when it comes to their deployment of technology.”
That enterprise lag means growth prospects are still strong for Canadian companies like e-commerce platform Shopify (Quote Chart TSX, NYSE:SHOP) and cloud-based supply chain SAAS company Kinaxis (Quote, Chart TSX:KXS), says Tse. The analyst likes Shopify’s optionality coming from its Shopify Plus service for larger companies, while he sees Kinaxis’ low relative market share as well-paired with the company’s demonstrated ability to build momentum on incumbents like German software giant SAP.
At the same time, Tse highlights the merits of so-called ‘legacy’ names of the Canadian tech scene like CGI Group (Quote, Chart TSX:GIB.A, NYSE:GIB) and OpenText (Quote, Chart TSX, NASDAQ:OTEX)whose valuations are relatively attractive and who are still producing strong recurring cash flow.
“Bottom line, while we admit the recent valuations have shifted the risk/reward profile in the short-term; in light of the fundamental outlook, we continue to look at pullbacks in those names as buying opportunities – looking beyond the short-term,” Tse says.