In the August earnings rally, many stocks surged on the back of strong revenue and earnings per share. However, that was not the case with Telus Digital, which trades on the stock exchange under the name Telus International (TSX:TIXT). This stock surged 20% in August after falling 93% in the last four years.
Why did TIXT stock fall despite the artificial intelligence (AI) boom? What led to the sudden rally? Is this jump a sign of recovery and time to buy the stock? Let’s find out.
Why did Telus Digital stock lose 90% of its value?
Back in 2021, when the technology sector was booming, Canadian telecom Telus Corporation (TSX:T) spun off its digital technology solutions business into Telus Digital and listed it on the stock exchange as Telus International.
The spin-off made sense back then as every company was undergoing digital transformation in the light of pandemic lockdowns, driving revenue and profits for digital solutions. Most software-as-a-service and digital solutions companies have low debt. To ensure the leveraged balance sheet of the telecom business does not slow Telus Digital’s growth, the company spun off the digital arm.
However, the 2022 tech stock meltdown changed the course of Telus Digital, and the stock lost 90% of its value. First came the tech stock sell-off as the Bank of Canada began an interest rate hike. As loans became too expensive, companies delayed technology spending, which pulled down Telus Digital stock further in 2023.
In mid-2024, when the Bank of Canada started rate cuts, the telecom regulator changed the world for Telus Corporation. The regulator forced Telus to share its network infrastructure with competitors, diluting the returns on infrastructure spending and creating a price war. While this initially boded well for small telcos, it discouraged big telcos like Telus and BCE. The big telcos cut their network spending and shifted focus to enhancing their 5G offerings.
On the one side, BCE started investing in cloud solutions, cybersecurity, and digital media. On the other side, Telus decided to bundle its offerings and sell them on competitor networks, thereby increasing average revenue per user (ARPU), which had fallen due to the price war. This strategy required Telus Digital to work under the same company as Telus Corporation.
What drove Telus Digital stock last month?
In light of the changing business model, Telus Corporation decided to acquire all shares of Telus Digital and make it a part of the company. At first, Telus proposed a US$3.40 per share offer on June 11, which saw Telus Digital stock jump 38% from $2.66 on June 5 to $3.67 on June 12. The stock hovered above the US$3.40 price throughout June and July.
It fell slightly in early August when it released its second-quarter earnings, which reported moderate 2% revenue growth and a goodwill impairment of US$224 million. Finally, on September 2, Telus Corporation upped its offer and sealed the acquisition deal at US$4.50 per share in a cash-stock deal.
The 20% rally in August is because of the premium Telus Corporation is paying Telus Digital shareholders.
Should you buy the stock?
Not all rallies are buying opportunities. Telus Digital has priced in the acquisition offer. If you already own this stock, it is a good time to cut your losses and sell the shares to Telus Corporation.
Avoid buying Telus Digital stock, as there is no upside left. Soon, you will be offered Telus shares for your Telus Digital holdings. Instead, consider directly buying Telus Corporation. The telecom stock will give you regular dividends and even grow them by 3–8% annually.
