5 Canadian tech stocks you should buy for 2021 from National Bank Financial

2020 was no fluke for tech stocks, says National Bank analyst Richard Tse, who delivered a report to clients on Tuesday where he profiled the year ahead, saying the technology sector’s outperformance relative to the rest of the market will continue in 2021.

Last year was massive for tech, both in Canada and the US, where the S&P Technology index was up 42.2 per cent compared to 18.4 per cent for the S&P 500 and Canada’s TSX Information Technology Index finished up a remarkable 80.7 per cent compared to 5.6 per cent for the S&P/TSX Composite.

Those across-the-board gains may give investors pause, wondering whether tech has any more room to run in 2021. And while Tse argues the higher valuations increase the risk profile and potential downside risk from a shortfall in expectations, especially over the short term, the analyst said over the longer term tech valuations may not be all that stretched.

“While our ratings and targets are based on fundamental valuation metrics; as we noted, when it comes to short-term price performance, we believe it will continue to be driven more by expectations around addressable market potential, relative positioning, and execution under this momentum driven market,” Tse wrote.

Tse outlined a number of themes which rose to the fore in 2020 and should continue to be dominant even when the COVID-19 pandemic has run its course.

First, technology became more essential than ever in 2020 as everyone and their dog took to Zoom and ushered in the work-from-home economy, and the prominence given to tech helped fuel capital raises for newer companies. Tse said that trend should continue in 2021 with more tech IPOs. Importantly, the analyst maintained the current tech-rush is quite different from the dot-com days of the late 90’s, with today’s crop of IPO’s being far more mature and with more scale already established than in 1999. For investors, Tse said to look for not just revenue growth but profitability as a key indicator of stock price performance.

Other continuing trends include the ongoing digital transformation, which remains top of mind for CEO’s during and then after the pandemic, the rise of digital security as the next derivative growth market, the re-acceleration of spending on cloud computing, the modernization of supply chains and, of course, the continued disruption of commerce as consumer behaviours change and e-commerce gains further traction.

With all that in mind, Tse highlighted five names to power investors through the year, starting with IT services provider CGI Group (CGI Group Stock Quote, Chart, News, Analysts, Financials TSX:GIB.A), which should get some tailwinds from the ongoing digital transformation. The analyst believes CGI’s revenue has now baselined from a COVID perspective, with many of its customers beginning to move ahead on former initiatives that were put on hold.

“As a market segment, we believe IT Services will be one of the segments in tech to bounce back faster on the other side,” said Tse, who reiterated his “Outperform” rating and $115 target for CGI, which at the time of publication represented a projected 12-month return of 14 per cent. (All figures in Canadian dollars except where noted otherwise.)

Cloud-based learning platform Docebo (Docebo Stock Quote, Chart, News, Analysts, Financials TSX:DCBO) was a COVID-boosted rocket last year, returning 387 per cent, but Tse still sees the company as in the early innings of a developing growth story with a multi-year growth runway. The modern architecture of its platform gives the company its edge, while investors should expect more OEM partnerships to provide an incremental growth driver, Tse said.

“We continue to believe Docebo has a differentiated product offering led by technology and a highly efficient sales and marketing model putting Docebo in a position to make meaningful market share gains,” Tse wrote.

The analyst reaffirmed his “Outperform” rating for DCBO with the new target of US$70.00 (was US$65.00), which at publication time represented a projected return of 15.1 per cent.

Kinaxis (Kinaxis Stock Quote, Chart, News, Analysts Financials TSX:KXS) also got the nod from Tse, who maintained his “Outperform” rating on the stock and underlined the importance of strong supply chain systems for companies during and post-COVID. Even with its gains in 2020 (80 per cent), there should be more to follow, said Tse, whose $250 target on Kinaxis represented at press time a projected return of 42.7 per cent.

“We believe KXS’s valuation does not fully value a “normalized” financial run rate looking ahead, particularly given what we estimate to be a market share of less than 5 per cent. With our expectations for accelerating momentum beyond the current pandemic, we reiterate our $250 target,” Tse said.

E-commerce company Lightspeed POS (Lightspeed POS Stock Quote, Chart, News, Analysts, Financials TSX:LSPD) picked it up big time over the second half of 2020, ending the year up 149 per cent, but Tse argued the company’s ability to flourish during the pandemic showed the resilience and adaptiveness of its business.

“It’s our view that if Lightspeed can operate under the conditions of the past year, we think a normalized environment would amplify that ability to execute that much more – the main reason why we still think there is plenty of upside in 2021. At the same time, we believe the Company has also opportunistically taken advantage of the market challenges to continue its land grab through acquisitions,” Tse wrote.

The analyst reiterated his “Outperform” rating on LSPD and upped his target from US$70 to US$80, which at press time represented a projected return of 7.3 per cent.

Finally, for those of us thinking that past success (mind-boggling as it has been) from Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) means it’s now too late to get on board, Tse argued it’s still early in the company’s build-out.

“For investors asking where future growth will come from, there continue to be a number of different vectors for that growth, all of which the Company is positioned within and if not, are building out, namely: (1) International; (2) increased take rate with new services; (3) SFN; (4) large enterprise; and (5) perhaps even new markets like B2B,” Tse said. “It’s those drivers that offer the potential for a material lift in revenue going forward and given the execution thus far, we believe it’s reasonable to price in those potential drivers.”

Tse reiterated his “Outperform” rating and upped his target price for SHOP from US$1250 to US$1400, which translates to a 12-month return of 18.9 per cent.