Instead of investing in the overpriced Shopify stock, Canadian stock market investors should purchase shares in Kinaxis (TSX:KXS) and Open Text (TSX:OTEX)(NASDAQ:OTEX) for the 2020 New Year.
Whereas Shopify is expensive and in a low-margin industry, Kinaxis and Open Text boast larger profit margins in a high-growth technology vertical. Because labour is still relatively scarce in cloud technology and data science, fewer companies can compete against each other to build top data analytics software than if there were a higher supply of skilled labour.
Less competition means higher profit margins for the companies that do take off from conception to reality. Given that Shopify reports a profit margin of negative 8.97%, Open Text and Kinaxis are much better investments.
Cloud-based enterprise data analytics are taking off with the popularity of machine learning and coding boot camps. Education is increasingly putting out the skilled labour necessary to build the software. At the same time, companies are demanding data analytics software that is easier to learn and use.
The better 2020 stock market buy
Open Text reports a higher levered free cash flow (FCF) than Kinaxis. Levered FCF is the earnings remaining for shareholders after the company pays debt financing costs. While Kinaxis reports a levered FCF of $27.5 million, Open Text boasts a levered FCF of $745 million.
Open Text is overall more profitable on multiple measures than Kinaxis. Overall, Open Text is a more efficient operation than Kinaxis with higher quarterly earnings growth. Since last year, Open Text earnings have grown by 104% — 34.7% more than earnings growth at Kinaxis.
Open Text is also the more affordable option at $56.91 per share; Kinaxis sells for a much higher $104.24 per share. Going into November, the price on Kinaxis stock surged by over $20 per share, but it isn’t clear if the stock can maintain that market value.
The stock market responds to government contracts
Kinaxis may be able to hold its valuation for one reason: government contracts. Dependable business relationships give stocks higher market values than what objective financial data would imply.
Kinaxis software helps enterprises manage global supply chain operations throughout the United States, Europe, Asia, and Canada. In light of the Huawei scandal, supply chain security is becoming more crucial for world governments. Kinaxis is in an excellent position to exploit the Huawei scandal to improve Canada’s net export position.
In particular, Kinaxis works for the aerospace and defence industry, which is willing to spend a lot of money to protect the supply chain from espionage activity. Government contracts mean that Kinaxis can support a higher stock market value than the typical software company.
Reliable dividends signal great stock market buys
Kinaxis is indeed a crucial asset for the Canadian government and our allies to manage global supply chain threats effectively. Nevertheless, Open Text is less expensive and issues a stable 1.63% dividend to shareholders. Kinaxis could keep surging in the next decade, but Open Text is the better value buy for Canadian investors saving for retirement.
Open Text may not be involved in a niche government vertical like supply chain management in aerospace and defence. Still, it boasts partnerships with many top global technology firms, including Microsoft and Oracle. Moreover, although the price-to-earnings (P/E) ratio on Kinaxis stock is an expensive 151, the price on Open Text is only 47 times earnings.
Typically, investors consider P/E ratios over 20 to be overpriced, but technology stocks tend to have higher P/E ratios. Every stock has the right investor. Aspiring retirees may prefer a long-term investment in Open Text, while Kinaxis’s expensive valuation may be better suited for big institutions.