Investors have been scooping up Initial Public Offerings (IPOs) like hotcakes these days, and Telus International was no exception. The U.S.-traded shares rocketed over 30% to just north of US$33, compared to an IPO price of US$25. I’ve never been an advocate of buying into IPOs or chasing their initial booms, given their limited trading history. When it comes to Telus’ spin-off, though, I’m willing to make an exception after the IPO has a chance to cool off and the dust a chance to settle.
After the latest correction, Telus International stock is now at $36 and change (US$29), nearly 10% down from its peak, but still considerably higher than its IPO price. While it would be nice to snag shares of TIXT at IPO levels, shares of the IT solutions provider are worthy of buying right here.
Telus International stock is a buy for its compelling long-term growth story
For those unfamiliar with Telus International, the firm is a top digital customer experience (CX) solutions provider, making it a magnificent way for Canadian investors to play the ongoing “digital transformation” trend, which, I believe, has been profoundly accelerated by the COVID-19 pandemic.
Telus International is growing much faster than its former parent company Telus. The firm boasts an incredible compound annual growth rate (CAGR) of nearly 40% over the last three years. Those are some great growth numbers and for a firm with an established, trusted brand name, the stock is well worth a premium price tag, perhaps way more than the IPO price.
The recent spike in the 10-year U.S. Treasury caused growth stocks to cool off in recent weeks. And I think the broader sell-off has opened up a terrific entry point for those keen on getting into Telus International. That said, there’s still no telling how much room this tech sell-off has to go or if TIXT stock’s post-IPO bust is just getting started.
IPOs boom and bust. Buying after the initial euphoria tends to be a good strategy, but only for those willing to buy into partial positions incrementally over time. Unlike most other growth IPOs that have been grabbing the attention of the mainstream financial media through 2020, Telus International actually has the earnings to back itself up and some impressive margins.
Well diversified across all fronts, with a strong balance sheet
The company is geographically diversified, with revenues coming out most parts of the world, most of which are derived from Europe (40%) and North America (22%). The firm’s clients also span numerous end-markets, from tech & games to communications & media to e-commerce & fintech, some of the hottest areas of the market these days.
Telus also has a robust balance sheet with enough dry powder to pull the trigger on further acquisitions. Over the years, Telus International has done a spectacular job of creating value via acquisitions. The firm’s most recent acquisition of Lionbridge AI (a deal worth nearly $940 million) could pay major dividends down the road.
There’s a lot to love about Telus International. It’s a terrific business, and I think it could grow to become a leader in the CX space as it continues leveraging the power of AI. The stock trades at a hefty multiple at 63.9x trailing earnings, but it’s pricy for a reason. You’re getting competent managers, best-in-class margins, a well-diversified mix of revenue sources, and some serious growth.
Should the stock pullback further alongside most other growth plays (perhaps to the IPO price?), I’d pounce. Until then, I’d recommend buying a half position here.
Stay Foolish, my friends.
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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 Joey Frenette has no position in any of the stocks mentioned.