The ATB Take: Finding Balance

Markets and growth stock valuations normalized in 2023 after last year’s overcorrection. Moving into 2024, interest rates remain high, meaning alternatives to growth assets still exist. Despite these headwinds, the multiples for high-quality growth assets are buoyant as year-end looms; Shopify, for example, trades at ~22x NTMe P/GP. Multiples have improved, but remain depressed across much of small-cap tech. The macroeconomic conditions and weak capital-raising market have had an impact on fundamentals, and growth rates have compressed significantly. 

In general, the secular growth stories and high-quality business models in software endure. A number of  names in our coverage universe look attractive when comparing the medium-term growth outlook to valuation. Our top picks for 2024 are Lightspeed Commerce, Real Matters, and Blackline Safety. Highlights include: 

Inflation Relief
It took time, but the “transitory” crowd is declaring victory as the year comes to a close. The US 10-year yield, a benchmark for the risk-free rate and highly relevant for growth stocks, is currently higher than it was on Jan 1, yet growth stocks have recovered considerably. Growth stocks seem to have settled into a “new normal” valuation range, much higher than feared, though further relief from rates and inflation would be welcome. 

More AI
Generative AI’s ‘Aha!’ moment stole the spotlight, but investment in AI has been persistent and impactful for years. In 2023, VC investment in AI jumped in a declining market, effectively crowding out other companies seeking to raise capital. We expect AI to keep dominating the headlines and to attract more capital in 2024. 

Small Cap Rally 
Small-cap technology stocks have underperformed, while large cap growth has been driven by mega-caps. In small caps, we see value and the opportunity for stock-picking. Predicting the macro is difficult, but investors can enter small-cap growth stories at attractive valuations. Our favourite small-cap name is Blackline Safety.  

Private Equity Put 
Private equity firms made notable acquisitions of small-cap Canadian stocks and large-cap North American stocks in 2023. Given an undervalued group, we expect more activity by private equity in Canadian public market equities.