Investing in artificial intelligence (AI) in Canada can be a rewarding venture, given the sector’s rapid expansion and substantial government support. However, AI investments can be highly volatile. To navigate this volatility, investors should focus on strong fundamentals and diverse investment vehicles. And that’s exactly what we’re going to do today. We’ll also see why one strong option includes Canadian supply-chain company Kinaxis (TSX:KXS).
But first, AI
The AI market is growing globally, with significant potential in Canada due to a supportive tech ecosystem and government initiatives. Key sectors where AI shows promise include healthcare, finance, transportation, and natural resources. Investors should consider companies with robust AI portfolios in these areas.
In particular, there are a few ways there should be AI support in the future. Federal and provincial initiatives can significantly bolster AI research and development. Strong research and development (R&D) capabilities and affiliations with leading research institutions are crucial. The availability of skilled professionals and the ability to attract and retain talent are vital as well.
To reduce volatility, investors can focus on companies with strong financial health, consistent revenue growth, profitability, and positive cash flow. It’s really that simple. Diversification across sectors and geographies can also reduce risk. Assess the company’s market position, business model, and commitment to R&D for long-term stability.
In focus: Kinaxis
With this in mind, what makes Kinaxis stock so great? The company is a prominent player in supply chain orchestration solutions, leveraging AI for end-to-end supply chain management. This has been seen time and again, especially during its earnings report.
In the first quarter (Q1) 2024, Kinaxis reported an 18% increase in total revenue compared to Q1 2023. Sotware as a Service (SaaS) revenue grew by 16%, and professional services revenue increased by 30%. This strong revenue growth indicates a healthy and expanding business.
Furthermore, net profit for Q1 2024 increased by 420% from the previous year, with earnings per share (EPS) rising from $0.04 to $0.21. Adjusted earnings before interest, taxes, depreciation, and amortization (EBTIDA) grew by 32%, with margins improving from 17% to 19%. This substantial increase in profitability and margins is a strong indicator of financial health. Annual recurring revenue (ARR) also grew by 15%, reflecting a stable and growing subscription base, which ensures long-term revenue stability.
Measuring volatility
So, now, let’s look at whether Kinaxis stock is too volatile to invest in as an AI stock. EPS has been highly volatile in the last few years, with dramatic swings from negative to extremely positive values. This inconsistency suggests significant fluctuations in earnings, contributing to potential stock volatility. Similar to EPS growth, net income has shown considerable volatility. Large positive and negative growth rates indicate unstable profitability, which can lead to stock price volatility.
Then, there are the valuation metrics themselves. Kinaxis has a high current price-to-earnings (P/E) ratio of 235.88, suggesting high investor expectations. Such high valuations can lead to significant price swings if the company fails to meet these expectations. And with the forward 54.64 P/E ratio, those expectations may not be met. However, the beta value of 0.78 indicates that Kinaxis is less volatile relative to the overall market.
Broadly speaking, Kinaxis is recognized as a leader in the supply chain planning solutions sector, with a strong product vision and execution capabilities. The company’s ongoing product leadership and focus on AI-powered supply chain orchestration position it well for future growth. Its recent restructuring initiative aims to improve operational efficiency and focus on high-growth areas. This proactive management approach is promising for long-term stability. What’s more, the company has increased its adjusted EBITDA margin guidance for FY 2024, reflecting confidence in continued growth and profitability.
Bottom line
So, while Kinaxis exhibits potential short-term volatility due to fluctuating EPS, net income, and cash flow variations, the overall fundamentals are promising. Strong revenue growth, profitability improvements, positive financial guidance, and expanding ARR indicate a robust business with a promising outlook.
Of course, investors should weigh the short-term volatility against the long-term growth potential when considering an investment in Kinaxis. By focusing on strong fundamentals and effective risk management, Kinaxis may be a good option for investors interested in AI but concerned about volatility.
