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In the midst of an uncertain and volatile macroeconomic environment, the technology sector has witnessed a substantial surge in 2023. The resulting rally has led to increased valuations for several tech companies, raising concerns about potential overvaluation. Here are two TSX tech stocks that may face a significant pullback if market sentiment takes a bearish turn.
Kinaxis Stock:
Kinaxis (TSX:KXS), valued at $4.1 billion, stands out as one of Canada's fastest-growing companies. Since its IPO in June 2014, Kinaxis has delivered an impressive 1,000% return to shareholders, even though the stock currently trades around 40% below its all-time highs.
Specializing in cloud-based subscription software for supply chain operations, Kinaxis serves enterprise clients globally, offering solutions such as sales and operations planning, inventory management, and control center services. In Q3 2023, the company reported a 21% YoY increase in sales to US$108 million, with adjusted EBITDA growing by 54% to US$22.8 million.
Despite strong financial performance, Kinaxis trades at a relatively high valuation, with a forward price-to-earnings (P/E) ratio of 52.3 and a price-to-sales (P/S) ratio of six. While analysts remain bullish, predicting a 51% surge in the next 12 months, investors should exercise caution due to the lofty multiples.
Docebo Stock:
Another high-growth tech stock, Docebo (TSX:DCBO), has shown remarkable performance since its IPO in late 2019, delivering a 295% gain to shareholders. However, the stock is currently down 46% from its all-time highs, presenting potential concerns.
In Q3 2023, Docebo reported a 26% YoY increase in sales to US$46.5 million, with subscription sales accounting for 94% of the top line. The company ended the quarter with annual recurring revenue (ARR) of US$181.8 million. Despite these positive metrics, Docebo trades at a premium, with a forward P/E ratio of 83 and a forward P/S ratio of 6.2.
While Docebo has focused on improving its bottom line, with forecasted adjusted earnings of $0.77 per share in 2024, investors should carefully consider the premium valuation. The stock's current pricing suggests the need for caution, especially in a market environment where sentiment may shift.
Investors evaluating these tech stocks should be mindful of the potential for a pullback, given their elevated valuations. Conducting thorough due diligence and considering risk factors will be essential for making informed investment decisions in the tech sector.
