Down by Almost 60%, This Secret Tech Stock Looks Like a Steal Today

This under-the-radar tech stock should appeal to investors seeking outsized returns through capital gains in the coming years.

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Shopify stock made quite the wave in the stock market when it initially emerged. Once a blue-eyed darling for the TSX, the massive tech stock has lost the momentum it gained initially after going public. Investors interested in high-growth through tech stocks have lost interest lately. Even if it were to climb again, it cannot offer the same returns as the initial investors enjoyed.

However, Shopify is not the only high-growth tech stock available on the market. In fact, there is a relatively low-key tech company that should warrant interest from stock market investors seeking outsized returns through capital gains over the next few years: Converge Technology Solutions Corp. (TSX:CTS).

Converge Technology Solutions

The Canadian tech sector boasts several names that seem attractive when it comes to investing in growth stocks. With a $945.9 million market capitalization, this Toronto-based hybrid IT infrastructure platform provider might not be as big as Shopify, but that is exactly what can make it an attractive growth stock to consider.

Converge Technology Solutions is a Canadian company building a platform of regionally focused hybrid IT infrastructure providers, delivering its solutions primarily to clients in the US. It offers a variety of solutions to empower its clients, including blockchain, managed services, multi-cloud solutions, and more.

As an IT company helping public and private-sector organizations address business and IT solutions, Converge Technology Solutions is only six years old.

In the short time it has been around, the company’s management has done a terrific job in growing the business. Over the last five years, Converge has acquired 35 companies to expand its presence and offerings. Its successful mergers and acquisitions strategy saw Converge increase its revenue more than twofold between 2019 to 2021, growing its operating income by four times in that period.

Despite all the stellar financial performance, the stock is down by almost 60% from its 52-week high. As of this writing, Converge Technology Solutions stock trades for $4.53 per share, down by 58.9% from its 52-week high valuation of $11.04 per share. The question is: Why is it down when the stock seems to be doing so well?

Why Converge fell down

In calendar 2022, Converge stock declined by over 58%. The primary reason for its substantial decline last year was the increase in benchmark interest rates. With borrowing costs getting higher, companies across all sectors suffered significant downturns. While higher interest rates do not directly impact Converge stock’s balance sheet, interest rate hikes tend to reduce stock valuations.

The company has used its common stock to make acquisitions instead of taking on debt. Using common stock to raise the necessary capital for acquisitions is an excellent strategy, but it works when share prices are high. With its valuation down by so much, using the same strategy might not be an ideal move.

Foolish takeaway

Despite its declining valuation on the stock market, Converge stock has been performing well financially. The tech stock’s net revenue for fiscal 2022 grew by 71%, adjusted EBITDA increased by 68%, and adjusted earnings per share grew by 55%. If the tightening monetary policies introduced to control inflation ease up, it can trigger a rally in growth stocks like Converge Technology Solutions.

A reversal in interest rate hikes can trigger an immediate rally. Otherwise, it can take a few years for Converge stock’s outsized capital gains potential to materialize.

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 Othman 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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