1 Undervalued Tech Stock I’d Buy Over Shopify

While Shopify stock is down 60% from all-time highs, it continues to trade at a premium. Here is another TSX tech stock for value investors.

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Shopify (TSX:SHOP) has created significant wealth for shareholders. The TSX tech stock has surged 2,660% since its IPO (initial public offering) in May 2015. In this period, the TSX index has gained less than 80%.

Despite its outsized returns, Shopify stock is down 60% from all-time highs valuing the company at a market cap of $110 billion. However, SHOP stock continues to trade at a premium and is priced at 9 times forward sales, which is quite steep.

Investors are worried about Shopify’s decelerating top-line growth and narrowing profit margins, resulting in the pullback in share prices. Present performance notwithstanding, Shopify remains well-positioned to benefit from the growth in e-commerce sales globally in the upcoming decade, allowing the company to keep expanding its revenue over time.

In recent months, Shopify has focused on reducing its cost base, but the company’s operating losses have totaled over $800 million in the last four quarters. The threat of an upcoming recession in the U.S. is also likely to drive consumer spending lower, which in turn will negatively impact Shopify stock in the near term.

While Shopify trades at a premium, there are several other TSX tech stocks you can consider buying at a cheap valuation today. One such stock is Softchoice Corp. (TSX:SFTC). Let’s see why.

The bull case for Softchoice stock

Valued at a market cap of $1 billion, Softchoice provides software solutions to enterprises. With a total addressable market of $300 billion, Softchoice has enough room to grow its top line, given it reported revenue of $928 million in 2022. With a customer base of 4,800, Softchoice also enjoys a revenue retention rate of 106%. It suggests existing customers increased by 6% in the last 12 months.

Softchoice operates in a large, growing, and highly fragmented North American IT solutions market. It designs, implements, and manages multi-vendor IT environments allowing customers to focus on their core operations.

In Q1 of 2023, strong demand for its software and cloud solutions offset hardware declines, which was consistent with industry trends. An asset-light model also allowed the company to increase adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 46% year over year to $15 million.

What next for SFTC stock price?

Softchoice went public in May 2021, and the stock is since down 19%. The TSX tech stock is priced at 1.1 times forward sales and 17 times forward earnings, which is very reasonable. Analysts tracking SFTC stock expect earnings to grow by 19.6% annually in the next five years.

Moreover, Softchoice also pays shareholders a quarterly dividend of $0.11 per share, indicating a yield of 2.45%.

Softchoice emphasized that 59% of gross sales are recurring in nature while the average customer tenure is over nine years. Its gross profit per customer has also increased from $48,000 in 2017 to $68,000 at the end of Q1.

Softchoice increased adjusted free cash flow by 29% to $77 million in Q1 due to higher adjusted EBITDA and stable maintenance CapEX and lease payments. These cash flows will be reinvested to drive organic growth or pursue accretive acquisitions.

Analysts remain bullish and expect SFTC stock to surge 19% in the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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