The TSX’s technology sector should be a winner again this year. However, a pair of software stocks remain undervalued. CAE (TSX: CAE) and Coveo Solutions (TSX: CVO) are the tech treasures to watch in 2024 for their innovations and long growth runways.
CAE, a large-cap stock, is down 5.24% year to date ($27.10) but is a top pick, given the current geopolitics environment, strong backlog, and potential growth recovery this year.
The competitive advantages are the world’s largest civil aviation training network and integrated live, virtual, and constructive (LVC) training solutions for defence forces. However, Coveo’s artificial intelligence (AI) platforms are growth catalysts.
Headroom for growth
CAE operates in the civil aviation and defence & security industries. The $8.62 billion high-technology company deploys software-based simulation training and critical operations support solutions. Its 250 sites and training locations in over 40 countries provide flight and mission simulators and training programs powered by digital technologies.
In the third quarter (Q3) of fiscal 2024 (quarter ending December 31, 2023), revenue and backlog increased 13% and 9% to $1.09 billion and $11.75 million versus Q3 fiscal 2023. However, operating and net income declined 14% and 28% year over year to $121.6 million and $56.5 million.
Still, CAE president and chief executive officer (CEO) Marc Parent said, “Our performance in the third quarter reflects strong underlying demand for our civil market solutions.” He also noted the ongoing progress to transform the Defense business. While free cash flow (FCF) declined 20.77% to $190 million from a year ago, it bolstered CAE’s financial position in line with management’s leverage targets.
Parent added that there is considerable headroom for growth in the civil aviation market. He expects continued positive momentum due to the strong demand for training and flight services solutions and CAE’s ability to win share within this large secular growth market. The Defence side has fixed-price legacy contracts that offer certain potential advantages and efficiencies.
On March 26, 2024, the company announced that its full flight simulator (FFS) with gaming-engine-powered CAE prodigy image generator achieves level D qualification. CAE is the first to achieve the highest-level FSS qualification.
“Our collaboration with Epic Games on the CAE Prodigy Image Generator is a huge leap forward in the use of technology to increase the efficacy of pilot training and make our skies safer,” said Abha Dogra, CAE’s chief technology and product officer. CAE Prodigy aims to elevate pilot training with its true-to-life visuals with higher-fidelity graphics.
Leveraging generative AI
Coveo Solutions lags behind its sector peers (-0.63% year to date) but should outperform soon because of its artificial intelligence (AI) platform. If you invest today, the share price is $9.54. The $974.33 million company’s enterprise AI platforms boast semantic search, AI recommendations, and GenAI answering features.
In the first three quarters of fiscal 2023, revenue, including Software-as-a-Service (SaaS) subscriptions, increased 12.81% year over year to US$93.5 million. The net loss thinned 39.81% to US$19.56 million versus the same period in fiscal 2022.
Coveo’s chairman and CEO, Louis Têtu, said there was a broad resurgence in new bookings with new and existing customers. “We believe we are beginning to see the strong early interest in generative AI turning into tangible opportunities with customers.”
Good buys
CAE and Coveo have pioneering businesses in their respective markets. These tech stocks are good buys before they rise to their intrinsic or actual values.
