Good morning. Many analysts and market watchers now believe investors want to see profits, not promises, which is a big reason why high-growth, debt-laden technology companies have taken a hit on both the stock and initial public offering markets. “For now, investors will focus on a company’s fundamentals, such as revenue growth, profitability and cash flows, over just growth projections,” says the EY Global IPO Trends 2022 report.
As a result, EY expects many prospective IPO companies will wait for a more appropriate time to enter the market, which might be a while since many existing growth stocks are still trading at incredibly high multiples that are bound to further compress. For example, Tesla Inc.’s stock is trading at a multiple of 38.6 times earnings (and rapidly dropping) despite losing 68.9 per cent of its value this year, while General Motors Co. and Ford Motor Co. are trading at 5.7x and 5.1x, respectively. Tesla makes crappy cars and has a mercurial boss who hasn’t been paying attention, so a multiple of five or six on it doesn’t seem outrageous. Yet analysts have an average 12-month price target of US$278, and one believes it will rise to US$450, or 3.6 times higher than it is now. Uh, OK, then.
But the mass dumping of Tesla stock by investors isn’t unique in the tech sector, though perhaps their chief executives aren’t constantly joining in the rout. Four of the five worst-performing stocks on the S&P/TSX composite this year are tech plays, according to a Bloomberg screen on Tuesday. The downtrodden are led by Bausch Health Cos. Inc., once Canada’s most valuable public company when it was known as Valeant Pharmaceuticals International Inc., which was down 72.8 per cent as of Tuesday,
Shopify Inc., another technology company that was briefly Canada’s most valuable company, is No. 2 on the hit parade, down 72 per cent in the past year to about $49. Analysts don’t think it will fall much further since the average 12-month target is $54.36. Only four of the 47 analysts who cover Shopify rate it as a sell, while 19 say it’s a buying opportunity. Lightspeed Commerce Inc. is another one-time tech darling getting hammered. Perhaps investors think its POS software means something other than point of sale given the stock was down 62 per cent.
J.P. Morgan Chase & Co. analyst Tien-Tsin Huang has a US$16 price target on Lightspeed, a couple of bucks higher than the US$14 it was trading at on Tuesday on the New York Stock Exchange (it has a dual listing), but cited a number of overhangs including results that lag its peers, last year’s short report by Spruce Point Capital Management and more challenging roll-up opportunities. “Furthermore, a challenging macro environment lowers expectations for near-term locations growth,” he notes.
Lightspeed, like Shopify, has analysts onside, with 17 buy and two hold ratings and just one sell, and a 12-month average target of $35.96, almost double the $18 and change it was trading at earlier this week in Toronto. Both Shopify and Lightspeed depend on a strong and growing retail market, but there are plenty of warning signs that consumers have already hit their spending limit. Mortgage defaults and foreclosures are now increasing and will likely keep increasing until the Bank of Canada starts cutting rates, something governor Tiff Macklem isn’t in too much of a hurry to do given his focus on inflation dropping to two per cent and the current rate of 6.8 per cent.
Legal software and services provider Dye & Durham Ltd., down 68.5 per cent, rounds out the list of tech companies in the bottom five. In the middle of them, though, is Canopy Growth Corp., a very misnamed company given its year-over-year sales were down 34 per cent in the second quarter even though the Canadian recreational market was growing 40 per cent.
“Canopy may be right about being positioned to win as the industry matures, but we anticipate ongoing challenges through 2022,” says a CIBC Capital Markets report from November that downgraded the stock to underperformer with a $12 price target (from $22). That seems optimistic given it was trading at about $3 on Tuesday. Investors have watched 70.3 per cent of Canopy’s value go up in smoke this year. Perhaps Canopy Lack-of-Growth Corp. would be a better name since nine of the 19 analysts who cover it have a sell rating and only two rate it a buy.
Of course, those with long enough memories will recall that trendy technology plays often get beat up. Two other tech companies that became Canada’s most valuable company for a short time were Nortel Networks Corp. and BlackBerry Ltd. (née Research In Motion Ltd.). The first went bankrupt and the second lost the smartphone marketing war to Apple Inc., transitioned into a cybersecurity software maker and plummeted on any list of Canada’s corporate elite. Its stock was down 52.5 per cent (as of Tuesday) this year, bad enough to be 10th-worst-performing stock on the year. At least it’s not bankrupt. And on that cheery note, Happy holidays.
Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected].