It’s a given that the past year has been rough on tech stocks, and seeing as central bankers haven’t flinched yet on their game plan, it’s still very uncertain when that pain will end. But National Bank Financial Markets analysts Richard Tse and John Shao think investors shouldn’t give up on the sector, as there are a number of names with very attractive fundamentals.
Tse and Shao delivered an Industry Note to clients on Thursday where they spoke of three such companies — CGI Inc (CGI Inc Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A), Coveo Solutions (Coveo Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CVO) and Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials NYSE:LSPD), all of which are currently sporting “Outperform” ratings from National Bank.
Reporting on a Montreal bus tour taken Wednesday (a sold-out one, at that) with a group of investors, Tse and Shao said their discussions with executives from all three companies reinforced their investment theses on CGI, Coveo and Lightspeed.
“Bottom line, the fact our tour had to be capped given capacity limits goes to show the interest in Tech seems to be alive and well – despite the broad sentiment,” Tse and Shao wrote. “And given our view that the names we saw all seem on plan (despite the macro sentiment), we think all the names above will play out the other side particularly given the valuation setup – that’s now below pre-pandemic levels.”
On global IT services company CGI, the analysts said they heard from their discussions that management was making a concerted effort to strengthen its intellectual property, which has the potential to expand profit margins. At the same time, Tse and Shao related that management has M&A on its mind, too, and indicated that the number of potentially big acquisitions is moving up.
“In a market that continues to see volatility and concerns around a potential recession, we’re surprised this name is not higher,” said Tse and Shao. “Yes, they have not made a big acquisition in a long time; yes, they are not growing as fast as some other services names. But those variables are also not ‘priced’ into the stock as far as we’re concerned, while you’re getting defensive attributes (next 12 months free cash flow yield of 7.5 per cent) with targeted mid-single digit organic growth.”
With its maintained Outperform rating, National Bank has reasserted a 12-month target on GIB.A of $135.00, for an implied multiple of 13.1x 2023 EV/EBITDA and a projected return of 72 per cent at the time of publication.
SaaS-based digital experience solutions company Coveo completed its $215 million IPO last November — just as the market chose to head south for the winter. The stock went from $16 to $10 to now around $6 per share, likely leaving investors wondering what’s on the horizon for this newbie name.
For Tse and Shao, the lack of profitability in Coveo has probably been a factor in terms of the market’s reaction, where the climate has decidedly shifted away from companies running on the promise of future earnings and more towards ones with positive earnings in the here and now.
In Coveo’s case, the company saw its revenue climb by 33 per cent in its fiscal 2022 (year end March 31), hitting $86.5 million, with SaaS subscription revenue rising a full 52 per cent. Adjusted operating loss was still $28.1 million, however.
“No doubt with profitability the focus in this market, it’s been penalized because of that; but that hasn’t changed the fact that Coveo continues to execute on its plan in a market that has yet to fully scale with a reasonable path to profitability,” said Tse and Shao.
The analysts said their Coveo investor session included some product demos tied to product overviews which convincingly demonstrated how Coveo’s AI adds to the company’s value proposition.
“We continue to think Coveo is one of the most innovative Technology companies in Canada. Our opinion aside, that view is validated by a growing roster of large enterprises,” they said.
Tse and Shao maintained an “Outperform” rating on Coveo Solutions and a $13 per share target price, which at the time of publication represented a projected one-year return of 126 per cent.
Finally, with Lightspeed Commerce, the stock has been badly beaten up, with investor confidence seemingly fading over the past 12 months amid a spate of big acquisitions in the United States and, again, a concern about profitability.
But for Tse and Shao, who met with new CEO Jean Paul Chavet as well as COO Brandon Nussey and CFO Asha Bakshani, those acquisitions have fortified LSPD’s platform and made it a more well-rounded e-commerce growth engine and, importantly, they said it looks like much of the integration work has already taken place.
“[G]iven Lightspeed’s operating resilience through the past few years when brick and mortar was under assault, we can only think what the potential upside could be once the integrations are complete and we get back to a fully normalized market where the Company continues to reiterate 35-40 per cent organic growth targets with lots of headroom to achieve that with Payments being one such example that’s still scaling,” Tse and Shao said.
The analysts maintained an “Outperform” rating on LSPD along with a target price of US$65.00, which at press time represented a projected return of 239 per cent.
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