Tech stocks have given investors a wild ride in 2023. They started the year by staging a massive AI-fueled rally, only to begin crashing in the second half of the year, resuming the bearish 2022 trend. It’s not hard to see why. It was AI, especially ChatGPT, that kicked off the 2023 rally in tech stocks. After GPT wowed the world with its human-like answers to complex questions, people really started to take notice. The trend hit a peak when NVIDIA put out its second-quarter earnings, showing revenue that was $1.5 billion ahead of what analysts were expecting. The stock briefly rallied after its earnings came out, although it gave up the gains in the ensuing months.
Why did the AI tech stock rally fizzle out? Put simply: because AI itself fizzled out. As of this writing, ChatGPT had booked three consecutive months of declining user counts, and NVDA stock had fallen 15% from its 52-week highs, putting it close to bear-market territory. Clearly, some of the “AI magic” has come off of tech stocks. However, some of them may still be good buys. In this article, I will explore two stocks that declined in the latest tech stock sell-off, which may nevertheless be good buys today.
Constellation Software (TSX:CSU) is a TSX tech stock that has fallen some 8% from its all-time high, which was set earlier this month. It was not exactly a “steep” crash, and it certainly hasn’t taken CSU to value-stock territory. However, CSU is now cheaper than it was a month ago, while being just as profitable and growing as quickly as before.
What is Constellation Software?
It’s a tech holding company that operates much like a venture capital firm. The software company invests in relatively small tech companies, usually purchasing them in their entirety for $5 million to $10 million. It then integrates the companies into its own business, and hopes to make a profit off of them. Where it differs from most venture capital companies is it aims to hold the companies it buys long term. It doesn’t look for quick exits.
Constellation Software has been doing quite well in recent quarters. In the second quarter, it delivered:
- $2 billion in revenue, up 26%.
- A $94 million increase in the fair value of investments.
- $103 million in net income, up 18%.
- $123 million in cash from operations, up 58%.
- $14 million in free cash flow, up 14%.
Overall, it was a pretty strong quarter. Granted, CSU stock is priced for growth. Trading at 45 times earnings. But perhaps these earnings will continue long term, making CSU stock worth it.
Lightspeed POS Inc. (TSX:LSPD) is another Canadian tech stock that sold off in the recent tech stock crash. Down 24% for the year, it has taken a much bigger beating than CSU has. Granted, Lightspeed is a more marginal business than CSU is. In its most recent quarter, it delivered:
- $209 million in revenue, up 21%.
- $-48 million in net income.
- $-27 million in negative EBITDA (earnings before interest, taxes, and depreciation/amortization).
As you can see, Lightspeed is unprofitable, and its most recent quarterly showing was worse than CSU’s was. However, its recent pullback was much bigger than that stock’s was, so it may be an intriguing dip-buying opportunity.