Top Picks for 2024 from ATB Capital

2024 will likely be a year that the markets normalize and a reversion to the mean could spell some big moves for small cap technology stocks.

That’s the high-level view from ATB Capital analyst Martin Toner, who in a research update to clients November 30, outlined his three top picks for 2024.

Toner assessed where he feels the markets are right now.

“Markets and growth stock valuations normalized in 2023 after last year’s overcorrection,” the analyst said. “Moving into 2024, interest rates remain high, meaning alternatives to growth assets still exist. Despite these headwinds, the multiples for high-quality growth assets are buoyant as year-end looms; Shopify, for example, trades at ~22x NTMe P/GP. Multiples have improved, but remain depressed across much of small-cap tech. The macroeconomic conditions and weak capital-raising market have had an impact on fundamentals, and growth rates have compressed significantly. In general, the secular growth stories and high-quality business models in software endure. A number of names in our coverage universe look attractive when comparing the medium-term growth outlook to valuation.”

Toner says several themes will dominate the coming year, including the idea that a “new normal” for inflation will stop weighing down small cap stocks and allow them to be valued on their fundamentals more than any outside force.

He also this the boom in AI will continue and says he expects it will continue to dominate headlines and attract investment. The analyst says he also expects the trend of private equity firms snatching up undervalued companies will continue but that this will happen against a backdrop of a rally in small cap stocks.

Toner’s three top picks for 2024 are Lightspeed (Lightspeed Stock Quote, Chart, News, Analysts, Financials TSX:LSP), Real Matters (Real Matters Stock Quote, Chart, News, Analysts, Financials TSX:REAL) and Blackline Safety (Blackline Safety Stock Quote, Chart, News, Analysts, Financials TSX:BLN)

“LSPD announced a major strategic shift in May 2023, Unified Payments (UP), requiring merchants to adopt both its flagship offering and Lightspeed Payments,” the analyst said. “UP also marked an explicit change in LSPD’s customer preference, with the Company focusing on merchants generating more than $500,000 in annual gross transaction value (GTV). In the midst of its international rollout, LSPD has seen better-than-anticipated success with the change, leading to a Q2/FY24 revenue beat, a stronger-than-expected bottom-line beat, and a FY24 revenue guidance increase. We believe the Company will have a strong 2024, driven by the continued adoption of UP, steady growth in high-value merchants, and a normalization of discretionary consumer spending.”

And Toner said those pesky interest rates may finally quell the massive headwind that Real Matters has been fighting.

“We continue to believe that REAL is an asymmetric play on interest rates,” he argued. “For three years, REAL has been making progress on winning customers and demonstrating competence, while volumes have declined significantly. Those declines effectively marginalize much of REAL’s weaker competitors. Volumes have declined by >90% to levels that are roughly one-third previous troughs (700k vs 1.8mm units). We view REAL’s market share in Title as spring-loaded for when volumes recover. We acknowledge that with mortgage rates above 7%, effectively zero homeowners are motivated to refinance purely for cost savings. However, cash-out refinancing is an increasing source of volume, especially as markets stabilize. The mortgages being written at >6% are building the pipeline for the market. We believe REAL has discovered efficiencies that should lead to structural margin improvement when volumes return, and the Company could make our midcycle EBITDA estimate of $25mm-50mm look conservative. We believe moderating inflation in an election year and lower mortgage rates will be tailwinds in 2024.”

Finally, the analyst says things are looking up at Blackline Safety.

“Following a period of considerable cash burn, BLN showed traction on its investments, with accelerating growth and a continued revenue shift towards high-margin service revenue. Last quarter, BLN reported record gross profit and its highest gross margin in nearly three years, and it continued to progress towards its stated goal of exiting FY23 with adjusted EBITDA profitability. Following two delays to the Company’s new G6 product, shipments began in
Q4/FY23. The Company’s lease securitization program has provided balance sheet relief, and BLN exited its last quarter with nearly $26mm in liquidity. Geographically, BLN has seen y/y revenue growth across all four regions for three consecutive quarters, headlined by noted strength in Europe and the Middle East. Blackline’s growth rate puts it into an exclusive group of industrial tech names. Growing recurring revenue, margin improvement, and increasing retention rates mean BLN’s business model is improving, which we believe deserves a higher multiple.”