The tech selloff surrounding equity markets has led to lower valuation multiples across the board. The tech-heavy Nasdaq index is still trading 26.5% below all-time highs, while the pullback for several technology stocks is much more.
For instance, TSX tech stocks such as BlackBerry (TSX: BB) and Enghouse (TSX: ENGH) are down 82% and 45% below recent year highs. While equity indices are expected to remain volatile in 2023, the ongoing bear market allows you to go bottom fishing and buy quality stocks at a bargain.
Let’s see which TSX tech stock, BlackBerry or Enghouse, is a better buy in March 2023.
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BlackBerry stock
BlackBerry has underperformed the broader markets for well over a decade. The Canadian tech giant exited the smartphone manufacturing business and pivoted towards providing software and cybersecurity solutions to enterprises.
While investors are patiently waiting for a turnaround, BlackBerry has flattered to deceive, as its sales have fallen from US$1.04 billion in fiscal 2020 (ended in February) to US$690 million in the last 12 months.
The company’s gross margins have declined by 10 percentage points in this period, and it reported an operating loss of US$194 million in the past four quarters. In the November quarter, BlackBerry reported revenue of US$169 million — a decline of 5% year over year.
During the earnings call, BlackBerry’s chief executive officer (CEO) John Chen emphasized that the company is in the midst of negotiating a few government deals, which should translate to top-line growth in the future.
BlackBerry also unveiled a slew of automotive software products and systems development partnerships earlier this year at the Consumer Electronics Show. Its potential list of customers for these products includes Dongfeng Motors, a China-based electric vehicle manufacturer, Italian car component manufacturer Marelli, and Germany-based automobile parts manufacturer Bosch.
In the last year, BlackBerry recorded a free cash outflow of $284 million and ended the November quarter with $450 million in cash. Valued at four times forward sales, BB stock remains a high-risk bet, given its negative profit margins and tepid revenue growth.
Enghouse stock
One of the best-performing stocks on the TSX, Enghouse Systems has returned 428% to shareholders since March 2013.
In fiscal 2022, the company’s revenue fell to $427.6 million, compared to $467.2 million in the year-ago period. Enghouse explained its revenue was impacted by a fall in sales from Vidyo, unfavourable foreign exchange rates, and the shift from on-premise solutions towards a SaaS (software-as-a-service) model.
Its adjusted earnings before interest, taxes, depreciation, and amortization stood at $140.6 million, indicating a margin of 33%. In fiscal 2022, Enghouse invested $72.3 million in research and development and deployed $20.2 million towards acquisitions.
Analysts now expect ENGH stock to increase sales to $483 million in 2024. Comparatively, adjusted earnings are forecast to rise to $1.73 per share. So, Enghouse stock is priced at five times forward sales and 25 times forward earnings, which is steep given growth forecasts are not too encouraging.
Bottom line
If I have to choose a winner between BlackBerry stock and Enghouse stock, I would pick the latter, as it delivers consistent profits and pays investors a forward yield of 1.7%. But investors remain bullish on BB stock and expect shares to gain close to 18% in the next year. Alternatively, Bay Street believes Enghouse stock is trading at a premium of 10%.
