What valuations are we seeing for Canadian application software companies?

What are we looking for?

For this Number Cruncher we will look at the valuations for 10 Canadian application software companies trading on the TSX.

The Screen:

We used StockCalc’s screener to select the 10 largest application software companies on the TSX composite and venture indexes. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if they are under- or overvalued compared with their price.

Overview of the techniques used:

• Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
• A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
• An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
• If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. Globe Unlimited subscribers can subscribe to StockCalc using the promo code ‘Globe30’, which offers a 30-day free trial and special pricing for the second month.

What we found

Application software is a broad category that includes software for the masses as well as specific applications for individual clients or industry-specific markets. Companies in this category tend to channel cash flow back into growth instead of dividends. (There are only three dividend payers in this group of 10). Analyst consensus estimates are generally higher than our models for the companies shown primarily owing to growth projections. We find with fast-growing companies, just to reach the current price our models would require growth rates well beyond what we would use. In Canada, the technology sector is dominated by software companies like Shopify and Constellation Software. Let’s look at a few of these companies:

Like so many other stocks, Shopify SHOP-T has rebounded significantly from its lows in early April, rising almost 50 per cent since then. Shopify offers an e-commerce platform primarily to small and medium-sized businesses. The company has two segments: the subscription segment allows Shopify merchants to conduct e-commerce on a variety of platforms and the merchant segment offers add-on products for the platform that facilitate e-commerce. Last month they rolled out a new AI product offering entitled “AI Store Builder,” which enables users to automate their website set-up process by asking questions that help shape the site’s features.

In its most recent quarter, Shopify’s revenue climbed by 27 per cent year-over-year to $2.36-billion, while it reported a net loss of $682-million. Our models show SHOP-T as essentially fully valued at this level. Shopify is listed on both the TSX and NYSE, and was added to the Nasdaq 100 index on May 19.

Dayforce DAY-T is a Canada-based global technology company providing cloud-based human capital management (HCM) products for large businesses looking to manage their payroll, tax, benefits, and talent intelligence. The company primarily services customers in the United States, select European countries, Australia, New Zealand and Canada, with its Powerpay platform. As of fiscal 2024, the Dayforce platform accounted for almost 80 per cent of company revenue and had 6,876 clients representing approximately 7.62 million employees. Our DCF model is below current price with the rest of our models and the analyst target above. Dayforce is listed on both the TSX and NYSE.

Enghouse Systems ENGH-T is a Canada-based provider of contact-centre and video software and services. The company’s operations are organized into the Interactive Management Group (IMG) and the Asset Management Group (AMG) with the majority of its revenue coming from IMG. The company has operations in Canada, the U.S., Britain, Europe and the Asia-Pacific region. In its most recent quarterly filing, a number of key revenue and earnings metrics were down year-over-year, noting some “demand-side hesitancy” and delays in capital investment decisions from its customer base, adding they believe the current environment creates opportunities given the company’s strong cash position and acquisition experience. All of our models as well as analyst consensus show upside to current price.

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from our models and Analyst target data.

Investing involves risk.StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.