Tech stocks aren’t really that overvalued, this analyst says

National Bank Financial Capital Markets analyst Richard Tse said in an Oct. 22 report that while this year’s tech rally has been narrow and dominated by AI-related names, longer-term growth expectations embedded in Canadian technology valuations appear reasonable.

“As we close in on the end of the year, what we can say is that performance has been narrow, requiring more attention to stock selection,” Tse said. “While AI and related names have seen outsized performance, there have been pockets of outperformers across special situations and M&A activity.”

He noted that the S&P/TSX Info Tech Index is up 20% year-to-date, in line with the S&P 500 Info Tech Index’s 21% gain as of Oct. 22. In Canada, AI-linked outperformers include Celestica (+186%), Shopify (+52%), OpenText (+38%), and Coveo (+19%), while special situations such as Kraken Robotics (+165%) and Zedcor (+79%) and M&A beneficiaries like TELUS Digital (+12%) have also led the way.

Tse said AI has created “a cloud” of uncertainty over the software and IT services sectors due to potential disruption, but that deal activity and niche growth stories continue to present opportunities.

“While headline valuations appear high, our implied growth analysis shows many of our favoured names, while seemingly expensive on one-year forward multiples, are less so against the longer-term outlook,” he said.

According to the National Bank’s internal model, which estimates implied long-term growth by comparing current enterprise values, forward revenue forecasts, and normalized margins to those of mature industry peers, Canadian tech stocks do not look overvalued.

Tse grouped his coverage into three valuation tiers, high, mid, and low, based on EV/sales multiples and weighted average cost of capital assumptions.

In the “high” valuation group (average 9.8× EV/sales), which includes Shopify, Kinaxis, Kraken Robotics, and Zedcor, implied long-term growth averages 8%, in line with historical industry growth of 12% and well below the median FY26 consensus revenue growth of 33%.

“The market’s growth expectations might be conservative despite the absolute valuations,” Tse said, adding that Shopify’s 10% implied long-term growth “does not look extreme given new growth drivers and operating leverage from AI.”

The “mid” valuation group (average 3.4× EV/sales), which includes Constellation Software, Coveo, Docebo, OpenText, VitalHub, and Altus Group, carries an implied long-term growth rate of 4%, also below historical norms of 10–12%.

The “low” valuation group (average 1.4× EV/sales), which includes CGI, Lightspeed Commerce, TELUS Digital, and Real Matters, implies negative long-term growth (-1%), largely due to Lightspeed’s -10% implied rate and TELUS Digital’s -2%.

“This likely points to market skepticism around their ability to gain and sustain revenue momentum,” Tse said.

“While certain pockets of the market screen as expensive, our long-term analysis suggests many names under our coverage are not expensive when measured against realistic growth assumptions,” he said. “For patient investors, the setup remains attractive.”

“The common view today when it comes to Technology is that valuations are high. Broadly, the U.S. Info Tech Index trades around 37x forward P/E today – in Canada, it’s closer to 53x. While high in absolute terms, we need to take into account the expected relative growth rates. All that had us updating our implied growth analysis. For those following our research, you’ve seen this analysis in the past – in short, it’s an internally built scorecard that assesses what valuations imply for growth for each of our coverage names – allowing us to make a call on whether those implied growth rates are reasonable based on our expectations of the respective coverage names outlooks,” Tse wrote.

“Specifically, by solving for the implied long-term growth using today’s enterprise value (EV), forward revenue estimates and normalized profit margins, we compare these implied growth rate outputs to the 10-year historical growth of mature peers (not necessarily direct comps) to assess whether the respective names are over- / under-valued. For example, if the implied long-term growth embedded in a current valuation is 1%, and we know that mature peers within the industry have grown on average 10% per year over the past 10 years, we can infer that the current valuation is relatively inexpensive and suggesting it’s reasonable to see upside if the company continues to deliver on growth / profitability. Conversely, if the implied growth rate is well above the historical norm, it may signal that expectations are already pricing in the longer-term growth expectations. From this, we can make a quantitative call whether each name is expensive or cheap and by what degree.”

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