The facts are clear—you should have exposure to Canadian information technology. Although the information technology sector makes up only a tiny 2.47% of the overall TSX, it has delivered outsized returns over the past twelve months.
Information technology stocks returned roughly 32% over the last year, handily outperforming every other TSX sector with the exception of consumer staples. Exposure to this tiny, but growing sector is an excellent way to diversify away from the under-performing energy and financial sectors that comprise 55% of the TSX.
CGI Group Inc. (TSX:CGI)(NYSE:CGI) and BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) are two of the most prominent Canadian tech names, and they couldn’t be more different. The important question is—which offers the best growth with the lowest risk? Let’s take a look at each.
CGI Group Inc. offers very low-risk growth
CGI operates within the relatively unglamorous world of back-office IT services. Although these services may not seem glamorous, the profits certainly are—CGI has grown its earnings per share at a compound annual growth rate (CAGR) of 24% over the past five years and has gown its revenues by 180% since 2010.
There is every reason to believe CGI will continue this impressive growth trajectory—in fact, CGI’s CEO Micheal Roach has an objective to double its revenue again over the next five to seven years. This growth will largely be propelled through CGI’s build-and-buy strategy, which focuses on making transformational acquisitions, as well as extending, renewing, and adding contracts with clients—taking advantage of rapid vendor consolidation within the IT space.
CGI’s most recent acquisition of Logica in 2012 was a huge success, generating $400 million of synergies. With $536 million in cash, CGI is widely expected to make another acquisition this year, which should further drive growth.
The best part about this growth? It comes at a very low risk thanks to CGI’s economic moat. The company has most of its revenues secured by long-term contracts averaging seven years, and many of these clients have been with CGI for 25 years or more. CGI obtains 33% of its revenue from the government sector, and due to the deep security and privacy concerns of this group, the renewal rate is an impressive 98%. These factors all contribute to high client retention, and therefore protected earnings.
BlackBerry offers an uncertain growth profile at very high risk
BlackBerry offers a very different risk/reward profile. The company is currently in the midst of a massive turnaround effort, and is attempting to re-invent itself largely as a leading software player in the growing enterprise mobility management (EMM) sector.
The EMM market—which provides enterprises with solutions that enable them to manage the rapidly growing number of mobile devices used by employees—is growing. Analysts estimate that worldwide EMM revenues will rise by 320% over the next four years, and BlackBerry is poised to benefit substantially from this growth, currently holding the number two market share in the industry with its BlackBerry Enterprise Server software.
CEO John Chen is targeting $500 million in software revenues by the end of 2016. The problem? Software is currently the smallest of BlackBerry’s segments at 8% of revenue, and it also happens to be the only segment that is growing. 46% of revenue currently comes from hardware, and 46% comes from service revenues.
BlackBerry’s service revenues have been in constant decline every quarter since 2012, and this will continue as users migrate to new BlackBerry 10 devices, which only collect service access fees from users opting for premium services.
Things in BlackBerry’s hardware division are also bleak. BlackBerry’s overall market share down to 1%, revenues are declining quarterly, and overall phone sales are down 38% in Q4 2014 alone as the company struggles to find relevance in a hyper-competitive marketplace.
The result has been that BlackBerry’s overall revenues have been declining for seven quarters. Although BlackBerry may have growth potential within its tiny software segment, it needs to offset declining service fees and generate sales growth, rather than declines, from its smart phones in very challenging conditions to see revenue growth.
The verdict? Stick with CGI
CGI offers a clear revenue and earnings growth trajectory with very low risk, whereas BlackBerry is a highly speculative play with a high downside risk and a very uncertain upside potential.
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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 Adam Mancini has no position in any stocks mentioned. CGI Group Inc. is a recommendation of Stock Advisor Canada.