7 technology stocks from ATB Capital

With valuations still depressed in small cap tech names, we’re now entering an “historic opportunity” for investors to buy growth-oriented tech stocks. That’s the conclusion from ATB Capital Markets analyst Martin Toner in a new Growth & Innovation Preview of second quarter results.

“Growth stories [are] intact despite revaluation and focus on profit,” Toner wrote in his Wednesday report. “While revenue growth has decelerated, most high quality growth stories in the space remain intact.”

Toner looked at the returns so far in 2023 from tech sector companies and pointed to a correlation between next 12 month (NTM) revenue growth estimates and share price performance over the first half of the year. That and revenue estimate changes were the strongest indicators, he said, implying that investors are once again willing to take the risk with faster growing companies.

Toner noted that while unprofitable companies in the SaaS space, for example, fared a lot worse in 2022 than profitable ones, the inverse has been true so far in 2023, where unprofitable SaaS names have outperformed profitable ones by 33 per cent to 19 per cent.

“In 2022, profitable companies outperformed unprofitable companies. In 2023, this has flipped. We believe this shows that idiosyncratic factors are important again to investors,” he said.

Valuations are now below pre-pandemic levels for the G&I space, Toner said, putting stocks into an overcorrection.

“We believe the ‘un-bubble’ in G&I stocks while it has alleviated in larger names is still very much apparent in small cap names. In our opinion, a historic opportunity to buy undervalued growth assets still exists,” Toner wrote.

Below are seven tech names under ATB Capital coverage with their current ratings and targets. All projected returns are as of the publication date of Toner’s report.

Stock: Docebo (Docebo Stock Quote, Charts, News, Analysts, Financials TSX:DCBO)

ATB Capital rating: Outperform

ATB Capital price target: $85.00
Projected 12-month return: 69 per cent

With its Q1 report, Docebo guided for second quarter revenue of US$42.9-US$43.2 million, which was below the consensus of US$44.3 million, Toner said, and contributed to a 17 per cent drop in the stock following earnings (the stock has since recovered). Toner said he’s looking for signs that the Q2 will represent the trough for Docebo’s SaaS revenue growth.

“We believe the Company is still investing in a go-to-market model that will produce sustained enterprise-driven incremental ARR growth. However, enterprise customers do come with longer sales cycles, which is likely hurting growth in 2023,” Toner wrote.

For the second quarter, Toner is forecasting revenue of $44.6 million, gross margin of 80.0 per cent and adjusted EBITDA of $3.1 million, all of which the analyst calls conservative estimates.

Stock: Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS)

ATB Capital rating: Outperform

ATB Capital price target: $220.00
Projected 12-month return: 19 per cent

Toner said Kinaxis management struck a more cautious tone in its Q1 comments, noting its longer sales cycles due to increased caution from enterprise clients. At the same time, Toner said management remains “very bullish” and is projecting plus-30 per cent annual recurring revenue growth for later this year.

Toner has estimated Q2 2023 revenue for KXS at US$105.8 million and adjusted EBITDA at US$15.2 million.

“As Kinaxis continues to reach customers in new verticals and geographies, its partnerships and value added resellers (VARs) are key the Company’s growth,” Toner wrote.

Stock: Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials TSX:LSPD)

ATB Capital rating: Outperform

ATB Capital price target: $40.00 (previously $50.00)
Projected 12-month return: 115 per cent

Toner has lowered his target on Lightspeed, saying there’s increased risk in the company’s new business strategy of focusing less on location growth and more on its high-value merchants while at the same time requiring existing customer to either switch to Lightspeed Payments or pay a third-party processing fee.

Toner’s Q2 forecast for LSPD is for US$196.6 million in revenue and negative US$10.3 million in adjusted EBITDA.

“As the Company will stagger the roll out, the benefits of higher penetration will not be fully realized until 2025 and beyond, however, we will look for evidence of churn, specifically in large merchants,” he said.

Stock: Real Matters (Real Matters Stock Quote, Charts, News, Analysts, Financials TSX:REAL)

ATB Capital rating: Outperform

ATB Capital price target: $9.00
Projected 12-month return: 39 per cent

Mortgage lending platform Real Matters has taken it on the chin with the drop in mortgage and refinance activity, but Toner is calling a bottom at the company’s already-released fiscal second quarter 2023. 

“While difficult to predict the timing, direction, or magnitude of the mortgage market improvement, the short answer is we believe volumes will begin a period of improvement,” he wrote.

For REAL’s fiscal Q3 2023, the analyst is estimating net revenue of US$11.2 million and adjusted EBITDA of negative US$1.2 million.

Stock: Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP)

ATB Capital rating: Outperform

ATB Capital price target: $90.00
Projected 12-month return: 8 per cent

Canadian e-commerce giant Shopify scored top and bottom beats of analysts’ estimates in its Q1 and management delivered better-than-expected guidance for the remainder of the year.

Toner said SHOP has become more cost conscious.

“Last quarter, the Company announced a series of moves reflecting a focus on profitability, such as divesting its high-cost logistics business and a 20 per cent reduction in force, resulting in one of the largest positive 2023 profitability revisions among large cap names,” he wrote.

Toner has made changes to his forecast, stemming from Shopify’s recent sale of its logistics business, and is calling for Q2 revenue of US$1.640 billion and adjusted net income of US$86.9 million.

Stock: Softchoice Corp (Softchoice Corp Stock Quote, Charts, News, Analysts, Financials TSX:SFTC)

ATB Capital rating: Sector Perform

ATB Capital price target: $21.50
Projected 12-month return: 26 per cent

Toner said the Q1 from Softchoice was a pleasant surprise in a seasonally weak quarter, but the beat of estimates was largely driven by two software orders that helped skew results upwards, according to management, while Hardware sales actually declined by 12 per cent year-over-year. 

Toner struck a note of caution on SFTC, saying, “Management called out slowing growth in its enterprise segment due to increased caution on IT spending. We will look for any signs of increased slowness.”

Toner has forecasted Q2 gross sales of US$615.0 million and adjusted EBITDA of US$21.8 million.

Stock: Thinkific Labs (Thinkific Labs Stock Quote, Charts, News, Analysts, Financials TSX:THNC)

ATB Capital rating: Outperform

ATB Capital price target: $4.50 (previously $6.50)
Projected 12-month return: 280 per cent

Toner said Thinkific Labs has now had two consecutive quarters of paid customer growth, which is an encouraging sign that its efforts on refining its go-to-market strategy is working. 

“Thinkific has done a good job of optimizing its cost structure, decreasing its operating expenses by 15 per cent and 12 per cent year-over-year over the past two quarters, respectively. Management expects more rightsizing in Q2, before settling into a normalized cost structure,” Toner said.

For Thinkific’s Q2, Toner has forecasted US$14.3 million in revenue and negative US$2.6 million in adjusted EBITDA.