Here’s why TELUS International is a buy right now

It’s part of the poorly performing software space but investors should be taking notice of TELUS International (TELUS International Stock Quote, Charts, News, Analysts, Financials TSX:TIXT), according to Scotia Wealth manager Greg Newman, who says TI is looking like a buy at these levels.

“This stock is part of the software patch that has been really badly beaten up and is trading near its 52-week low,” said Newman, senior wealth advisor for Scotia Wealth Management, who spoke on BNN Bloomberg on Friday. “But I think from here it’s a pretty good risk/reward. It’s trading underneath its issuance price and it’s trading around 19x 2023 multiple with about a 20 per cent growth rate.”

TELUS International is the IT services and digital customer experience (DCX) wing of Canadian telecom and tech company Telus (Telus Stock Quote, Charts, News, Analysts, Financials TSX:T), and it had a coming out party as a public company last year where it had the largest tech IPO in the history of the Toronto Stock Exchange.  The $7-billion market cap TIXT did alright in its inaugural year, managing to end 2021 at break-even after some ups and downs, but this year has been not so good for TIXT as the stock now down by about a third year-to-date.

That’s par for the course for a software space that has been pummelled in recent months. The iShares Tech Software Sector ETF (Tech-Software Stock Quote, Charts, News, Analysts, Financials NASDAQ:IGV), for example, which attempts to track the North American software space as a whole and holds names like Microsoft, Adobe, Salesforce and Oracle, is equally down about 31 per cent since this past November, as the market continues its rotation away from growth stocks in favour of value and more defensive plays.

But Newman says the pullback on TELUS International should be seen as an opportunity, even if the payoff date remains unclear — and potentially quite a bit down the road.

“Understand that if you’re really going into inflationary period like the 1970s, growth stocks are probably not going to do well for a long time. And understand that after the dot-com burst it took ten years for software to right itself,” Newman said. 

“But I think the better view is that we’re not in the ‘70s and I think the better view is that it’s possible that we could have a soft landing, and I think you want to be picking around stocks like this that are pretty cheap on a price to growth basis,” he said.

“So, I would be buying a little bit [of TELUS International]. I wouldn’t be buying full positions here, but if you think about it, maybe I buy ten per cent of it into this weakness, and I think over the next two to three years, you’re going to be rewarded,” Newman said.

TELUS International has been busy since its IPO last February, acquiring and integration Lionbridge AI to bulk up its Data Solutions and Artificial Intelligence capacities, while the company earlier this year also acquired Playment, a data annotation services business with a SaaS-based platform to transform video and images into high-quality annotated data. 

TIXT’s business grew substantially, as well, with new delivery centres opening over the past year or so in the US, the Philippines, Bosnia and Herzegovina and Guatemala.

By the numbers, TIXT generated $2.2 billion in revenue last year, up 39 per cent from the year before and sporting an organic revenue growth rate of 17 per cent. Net income was $78 million, while adjusted EBITDA was $540 million, up 38 per cent from a year earlier, and adjusted diluted EPS was $1.00 per share for the 2021 year compared to $0.71 per share for 2020.

“Since 2005, we have become a leading digital CX and IT provider with more than 58,000 team members in 28 countries around the globe,” said TELUS International President and CEO Jeff Puritt, in a February 3 press release marking the company’s one-year anniversary as a public company. “Today we support the full lifecycle of our clients’ digital transformation journeys, working in partnership with them to shape their digital vision and strategies, design scalable processes and identify opportunities for innovation and growth to deliver better business outcomes.”

Ahead of first quarter financials due on Friday, TIXT’s Q4 2021 revenue was up 36 per cent to $600 million and net income was $36 million, with diluted EPS at $0.13 and adjusted EBITDA at $128 million. 

TELUS International said its team member count was at 62,141 at the end of the Q4, up 23 per cent year-over-year. As a whole, the customer experience management (CEM) sector is expected to continue strong growth in upcoming years, reflecting an evolving need for businesses to further understand customer engagement with their respective platforms. A Fortune Business Insights report earlier this year projects the CEM will grow by a CAGR of 16.2 per cent over the next seven years to be worth $32.53 billion by 2029.