Buy these three tech stocks for gains in 2019: Industrial Alliance Securities

With a more defensive mindset creeping into the markets, want to know which Canadian technology stocks you should be buying in 2019? Canadian bankers Industrial Alliance Securities has an answer for you.

IA analyst Blair Abernethy has taken a look at Canada’s technology sector and found three Top Picks for 2019, giving the nod to OpenText (OpenText Stock Quote, Chart TSX:OTEX), Kinaxis (Kinaxis Stock Quote, Chart TSX:KXS) and Absolute Software (Absolute Software Stock Quote, Chart TSX:ABT).

Thematically, the tech industry should see the continuation of a number of established trends in 2019, says Abernethy, whose Canadian Technology report was released on Thursday. The transition from on-premise enterprise applications to SaaS and cloud-based providers will continue to move IT budget spending away from integration services and maintenance contracts and over to subscription services. And 2019 should also see the further integration of AI and machine-learning technologies used in data creation and collection. Abernethy notes that in terms of the IT spending environment, Gartner is projecting IT budget growth to keep growing but at the more moderated pace of 3.2 per cent.

“Clearly, slower economic growth in the US (the biggest IT market) and rising interest rates will be a headwind for the overall IT industry in 2019,” says Abernethy. “We note that the recent slowing of macro economic growth in China should have little direct impact to companies in our coverage universe.”

On OpenText, Abernethy thinks that the company is attractively priced, with a stable 73 per cent of its revenue base recurring in nature and its EBITDA margins in the mid-to-high 30 per cent range. He sees recent acquisitions such as Liaison Technologies as reinforcing OTEX’s business model and helping to enable higher margins going forward.

“We expect OpenText to take advantage of any economic slowdown and market turmoil to more aggressively pursue accretive acquisitions at more favourable pricing,” says Abernethy. “Longer term, we believe that OpenText’s installed base of unstructured data management applications will become more important to customers as AI/machine learning applications proliferate within their enterprises.”

The analyst rates OTEX a “Buy” with a one-year target price of US$42.00, representing a 17 per cent projected return. (All return rates are as of time of publication.)

On Kinaxis, Abernethy sees its double-digit revenue growth continuing, noting that the company has a multi-year backlog and stable of partnerships with leading systems integrators.

“We expect Kinaxis to continue to grow rapidly, with solid operating margins, throughout 2019 as its customers make long-term (ten years and above) decisions to adopt its technology in order to achieve significantly higher ROI from their supply chain operations,” he says. “Kinaxis has a multi-year lead over its largest competitor and continues to widen this advantage through the incorporation of machine learning technology.”

Abernethy gives KXS a “Buy” rating and $88.00 target, representing a projected return of 17 per cent.

Absolute Software is pick #3, with Abernethy praising the company’s solid balance sheet, consistent profitability and solid (90 per cent) recurring revenue.

“In recent years, the company has pivoted its strategy and expanded its product offering to enable it to apply its patented persistence capability to a broad range of use cases, including GDPR compliance and cybersecurity applications,” he says. “[Absolute] recently hired a new, high-profile CEO with a proven track record of managing rapid growth software businesses in the end-point management and security space. With activist investors on the board, we see Absolute as a likely take-out candidate within the next two years.”

Abernethy rates ABT a “Buy” with a target of $10.50, representing a projected return of 29 per cent.