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Canadian tech is beating the market badly. It’s not done, says National Bank

Canadian techCanadian tech stocks should continue to shine past the second quarter earnings season.

That’s the thinking from National Bank Financial analyst Richard Tse who delivered a technology update to clients on Monday where he profiled 14 names in his coverage universe, giving “Outperform” ratings to seven of them.

It’s definitely salad days for tech stocks, with markets favouring the sector for growth both during and after the COVID-19 pandemic as industries across the board shift to more remote work environments and e-commerce continues to thrive.

The proof is in the numbers, where the S&P Technology Index is currently up 16.6 per cent for 2020 while the broader S&P 500 is up just 0.9 per cent. The gap is much wider in Canada, where the TSX Technology Index is up a mammoth 61.5 per cent (powered by Shopify’s 153.9 per cent return year-to-date) versus a 3.7 per cent rise for the broader S&P/TSX Composite.

Overall, Tse said the second quarter will look a little less rosy than the previous quarter but longer-term prospects are still great for Canadian tech.

“As we head into Q2 reporting, we don’t think the results will fare as well as Q1,” Tse wrote. “That said, based on the early reporters it appears those results are coming in line with reset expectations.”

“Fortunately, since the beginning of this pandemic, we’ve had the view that the market is looking to price in 2021 and 2022 and from that perspective, we’ve continued to be quite bullish on our sector. While we have no idea when this health crisis will end, we’re confident it will and despite the disruption in the interim, we think the secular growth drivers for technology won’t go away – if anything, we’ve been suggesting we could see an acceleration in the underlying drivers. For now, we continue to believe investors should hold a cross-section of names with defensive attributes (strong balance sheets, recurring revenue / cash flow) and opportunistically wade into growth names,” Tse wrote.

In his coverage universe, Tse is expecting an in-line quarter from Absolute Software (Absolute Software Stock Quote, Chart, News TSX:ABT), which he rates as “Sector Perform” with a raised target of $15.00 (previously $12.00), which represented a return of negative one per cent. (All projected returns are as of publication date.) Tse says the stock has a balanced risk-reward profile with some compelling defensive attributes, most notably related to being a beneficiary of the work-from-home shift. (All figures in Canadian dollars unless where noted otherwise.)

Absolute Software

On Altus Group (Altus Group Stock Quote, Chart, News TSX:AIF), Tse is sticking with his “Sector Perform” rating and $40 target, which amounted to a negative five per cent one-year return, saying while there’s a potential for value creation coming from Altus Analytics’ transition to the Cloud, the stock is already pricing in a good chunk of that execution at this point.

Tse has an “Outperform” rating and $100 target (both unchanged) for CGI (CGI Group Stock Quote, Chart, News TSX:GIB.A), saying he’s expecting an essentially in-line to slightly softer fiscal third quarter from the company. Over the longer haul, the analyst thinks IT Services will be one of the segments in tech to bounce back faster.

Constellation Software (Constellation Software Stock Quote, Chart, News TSX:CSU) gets a maintained “Sector Perform” rating with a new target of $1,600 (was $1,400), with Tse expecting the pace of capital deployment for the acquisition giant to slow going forward given the current health backdrop. That plus CSU’s current valuation make for a balanced risk-to-reward profile. Tse’s target represented a zero per cent return, at press time.


eLearning platform company Docebo (Docebo Stock Quote, Chart, News TSX:DCBO) is also unchanged at “Outperform” and with the maintained target of $55, which represented a 41 per cent return. Tse said sector tailwinds will provide more upside to a stock that’s already traveled a long way.

EXFO (EXFO Stock Quote, Chart, News TSX:EXF) recently reported better-than-expected fiscal third quarter results, according to Tse, who said a valuation rerating is likely in the cards but that there’s uncertainty around timing of the company’s deployments given COVID-19, hence the “Sector Perform” rating maintained and US$4.00 target, which represented a return of zero per cent.

Streaking Kinaxis (Kinaxis Stock Quote, Chart, News TSX:KXS) retains its “Outperform” rating and $250 target from Tse, who called the stock one of his favourite names, with COVID-19 underscoring the importance of robust supply chain systems and processes. KXS’s $250 target represented a projected return of 26 per cent.

eCommerce platform Lightspeed POS (Lightspeed POS Stock Quote, Chart, News TSX:LSPD) has done well to bounce back from the market pullback, with Tse expecting an essentially in-line fiscal first quarter (ended June), saying that short-term challenges won’t change his bullish investment thesis on the
name. Tse maintained his “Outperform” rating but raised his target from $40 to $45, representing a return of 29 per cent.


Maxar Technologies (Maxar Technologies Stock Quote, Chart, News TSX:MAXR) should also deliver an in-line Q2, with Tse saying the company’s better-looking debt outlook melds with a timeline for scaling that won’t be until fiscal 2023, making the stock’s current valuation reasonable: “Sector Perform” with a US$17 target, representing a return of two per cent.

Mediagrif (Mediagrif Stock Quote, Chart, News TSX:MDF) should have in-line results for its upcoming fiscal first, according to Tse, who while not negative on the name still feels the company’s growth targets are a long ways (five years) off: also “Sector Perform” with a maintained $6.00 target, representing a return of six per cent.

Expecting in-line results from OpenText (OpenText Stock Quote, Chart, News TSX:OTEX), Tse is nonetheless bullish on the stock, which he sees as having strong defensive attributes and a growing base of recurring revenue. The analyst is maintaining his “Outperform” rating with the new target of US$50 (was US$40), which represented a projected return of 14 per cent.


Real Matters (Real Matters Stock Quote, Chart, News TSX:REAL) also kept its “Outperform” rating, with Tse expecting solid results in its upcoming fiscal Q3 off of continued strength in the US mortgage and refinancing market. Another growth driver for the company could be its data monetization assets. Tse has maintained his $40 target, which represented a return of 38 per cent.


High flier Shopify (Shopify Stock Quote, Chart, News TSX:SHOP) kept its “Outperform” rating from Tse due to the wealth of untapped market potential in its e-commerce platform and its vanguard position in a market that’s structurally changing toward more e-commerce: US$1,250 target,
unchanged, which represented a return of 24 per cent.

Lastly, Sierra Wireless (Sierra Wireless Stock Quote, Chart, News TSX:SWIR) maintained its “Sector Perform” rating but with a lifted target of US$11 (previously US$9), with Tse expecting Q2 results to be in-line to soft and the timeline for the company’s strategic initiatives to be pushed out somewhat due to COVID-19. Tse’s US$9 target represented a return of 20 per cent.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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