Canadian Technology: The Future Remains Bright

By Andre-Philippe Hardy and Paul Treiber
Published August 8, 2022 | 28 min listen

The last two years have been nothing short of incredible in the technology sector, with a dramatic increase in technology adoption through COVID and technology stock valuations peaking at the end of 2021, followed by a significant market pullback year-to-date. In this podcast, Paul Treiber, Canadian Technology Analyst, and Andre-Philippe Hardy, Head of Canadian & APAC Research, discuss the state of the technology sector and more specifically technology in Canada, including the key factors that have impacted investor sentiment on technology stocks lately, why technology spending may be more resilient now than in prior years, and why technology investments are likely to continue to increase over the long-term. We also explore the evolution of the Canadian technology landscape over time, such as the rise of the iPhone and its impact on BlackBerry.

Disclosures and Disclaimers


View audio transcript


Technology: From market darling to market pariah…

Over the last two years, there was a step function increase in technology adoption due to social distancing measures related to COVID. Additionally, risk-free rates dropped to generational lows. This led to technology valuation multiples increasing by about 40% on average by late 2021 compared to pre-COVID levels. For some technology companies – particularly high growth and unprofitable ones, the increase in valuations was even more substantial.

However, over the last 6 months, risk-free rates have doubled, a recession is now possible, and valuation multiples for technology stocks have dropped substantially. On average, valuations are now back in line with pre-COVID multiples, but for high-growth and unprofitable technology stocks, valuation multiples are substantially below pre-COVID averages.

 

 …Even though technology spending may be more resilient now than in prior years

A large portion of technology spending relates to investments in software. Software is now deployed on a subscription basis, which provides high near-term visibility to vendors. Additionally, software is quite sticky since it is intertwined with business processes, whereas back in the late 1990s, technology was sold on a one-time basis, so sales were very cyclical.

While current spending appears resilient, the rate of growth may slow as projects could be delayed. Additionally, some technology companies are unprofitable as they are making significant growth investments. So the cash burn of many of these smaller, rapidly growing companies, plus the potential of slower growth, helps explain the significant risk-off sentiment for technology stocks at the moment.

 

Productivity gains and strategic differentiation to sustain long-term technology adoption

Due to social distancing measures, COVID lifted adoption of all sorts of technology. The best example is video conferencing. Will usage of some technologies remain as high as during the height of COVID? Probably not. However, over the long-term, technology adoption is likely to continue to rise for two key reasons: (1) productivity gains – technology automates manual processes, reducing costs; and (2) strategic differentiation – technology in many cases enables improved or unique customer experiences.

 

Technology’s importance to the economy is likely to continue to rise

Investments in intellectual property in the U.S. have increased from 2% of GDP in 1980 to 5% last year. Market forces, in our view, will continue to drive increased technology investments over the long-term. Technology adoption is typically driven by new entrants. The lower costs or improved ease of use due to technology eventually becomes industry standard. Competitors that lag either catch up in making new investments or lose market share. Hence we believe the future remains bright for the technology sector generally, and Canadian technology alike.



André-Philippe HardyIndustries in MotionPaul Treiber

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