What can investors expect from tech and growth stocks this year? According to ATB Capital Markets analyst Martin Toner, it’s all about taking advantage of the current disconnect between companies and their valuations, which have gone from inflated to now over-corrected. Toner delivered an update to clients on Sunday where he reiterated a number of Canadian tech stock picks for 2023.
With just one week in the books, the new year hasn’t gotten off to a great start for Growth & Innovation stocks. Toner pointed to a 2.1 percent loss over the first week in January for stocks in the space as well as news from the US Federal Reserve’s December meetings, reported last week, which said that while interest rate hikes are likely to slow in 2023, there’s no talk of rate cuts for this year, a result which will have its impact on the more rate-affected growth sector, Toner said.
As well, recession risks have made tech companies rein in their 2023 outlooks. Toner looked at 54 software companies and found 2023 revenue guidances were revised downward by a median of two percent in companies’ pre- and post-third quarter earnings reports, with only 13 companies receiving positive revisions.
At the same time, Toner said the fundamentals for companies in the Growth & Innovation space have held up well despite a deteriorating macro backdrop, noting in particular enterprise SaaS companies, which have seen slowed growth but without declines in revenues.
The result is an advantageous position for investors, Toner argued.
“Growth stocks have gone through an unprecedented compression in multiples, especially small capitalization stocks. We believe this is an overcorrection. Heading into 2023, we believe the space is in an ‘un-bubble’ and that values are disconnected from fundamentals, especially for smaller and less liquid stocks. We believe an opportunity exists for patient investors with longer time horizons seeking strong, durable growth stories,” Toner said.
As for stocks, Toner mentioned top picks Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS) and Docebo (Docebo Stock Quote, Charts, News, Analysts, Financials TSX:DCBO).
On Shopify, Toner believes the stock will be driven by an improved e-commerce environment in 2023, increased communication with investors by management and positive impacts from the company’s growth initiatives like Audiences and Shop Pay.
On supply chain management platform Kinaxis, Toner said the company is in a prime position to benefit from the current and ongoing emphasis businesses are placing on transforming their supply chains.
Finally, on learning management platform Docebo, Toner likes the strong growth the company has displayed in recent years and he pointed to a strong pipeline and beneficial focus by management on driving higher profitability.
Stock: Shopify
ATB Capital rating: Outperform
ATB target price: $75.00
Projected 12-month return: 43 percent
Stock: Kinaxis
ATB Capital rating: Outperform
ATB target price: $200.00
Projected 12-month return: 35 percent
Stock: Docebo
ATB Capital rating: Outperform
ATB target price: $90.00
Projected 12-month return: 105 percent