These 2 Stocks Might Be Getting a Little Too Expensive

TSX tech stocks such as Kinaxis and Docebo trade at a lofty premium in 2024, despite their enviable growth rates.

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Despite an uncertain and volatile macro environment, tech stocks have surged significantly higher in 2023. The rally in tech stocks has increased the valuation of several companies, making them expensive at current multiples. Here are two such TSX tech stocks that may experience a significant pullback if market sentiment turns bearish.

Kinaxis stock

One of the fastest-growing companies in Canada, Kinaxis (TSX:KXS) is valued at $4.1 billion by market cap. Kinaxis went public in June 2014 and has since returned a whopping 1,000% to shareholders. Despite its outsized gains, the TSX tech stock traded roughly 40% below all-time highs.

Kinaxis provides cloud-based subscription software for supply chain operations to enterprise-facing clients globally. Its cloud-based platform offers solutions such as sales and operations planning, inventory management, advanced planning, sales and operations planning, and control centre services.

It serves clients across sectors such as aerospace and defence, automotive, consumer products, industrial, retail, and more.

In the third quarter (Q3) of 2023, Kinaxis increased sales by 21% year over year to US$108 million, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 54% to US$22.8 million. So, the company increased its EBITDA margin from 21% in Q3 to 17% in the year-ago period, showcasing the high operating leverage associated with asset-light tech companies.

Kinaxis ended Q3 with annual recurring revenue of US$304 million, up from US$259 million in the prior year quarter. An increase in recurring revenue provides companies with predictable cash flows across market cycles.

Analysts expect Kinaxis to grow sales from $500 million in 2022 to $680 million in 2024. Comparatively, adjusted earnings are forecast to expand from $2.17 per share to $2.76 per share in this period. Priced at six times forward sales and 52.3 times forward earnings, KSX stock trades at a lofty multiple.

However, analysts remain bullish and expect shares to surge by 51% in the next 12 months.

Docebo stock

Another high-growth tech stock, Docebo (TSX:DCBO), has gained 295% to shareholders since its IPO (initial public offering) in late 2019. Down 46% from all-time highs, Docebo is valued at $1.9 billion by market cap.

In Q3 of 2023, Docebo increased sales by 26% to US$46.5 million. Subscription sales stood at US$43.6 million, accounting for 94% of the top line, rising 27% compared to the year-ago period.

Docebo ended Q3 with annual recurring revenue or ARR of US$181.8 million, up from US$144.6 million in the prior-year quarter.

Docebo is used by 3,679 customers, indicating an average contract value of US$49,416, up from 3,245 customers and an average contract value of US$44,561. So, Docebo is expanding both its customer count and customer spending, which indicates strong engagement rates.

In recent months, Docebo has focused on improving the bottom line and is on track to end 2024 with adjusted earnings of $0.77 per share, up from $0.28 per share in 2022. Comparatively, sales are forecast to rise from $191 million in 2022 to $300 million in 2024. Priced at 83 times forward earnings and 6.2 times forward sales, Docebo trades at a premium.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Docebo and Kinaxis. The Motley Fool has a disclosure policy.

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