A sign displaying a Nuvei logo at the Toronto Stock Exchange on Nov. 5, 2020.Mark Blinch/Globe and Mail
A flurry of Canadian technology companies went public during the COVID-19 pandemic, the most since the dot-com boom, but not even two years later, some have started buying back their newly listed shares to support sagging stock prices.
It is a bold strategy. Typically, companies decide to buy back stock because doing so will boost their earnings per share (EPS) by reducing the number of shares outstanding. EPS is financial metric that is closely watched by institutional investors and analysts.
Yet the majority of tech companies that went public in Canada over the past two years do not make money – and never have. In other words, they have no EPS to boost.
Nor do they pay dividends. Sometimes, dividend-paying companies will repurchase shares to reduce future monthly or quarterly distributions. As growth stocks, tech companies rarely pay dividends, so that is not the case here, either.
Since the start of the year, at least five Canadian tech companies that went public during the pandemic have announced normal course issuer bids, the formal name for share buybacks. Two of these repurchase programs were announced in the past two weeks.
Of the five companies, four – Q4 Inc. QFOR-T, Payfare Inc. PAY-T, Pivotree Inc. PVT-X and VerticalScope Holdings Inc. FORA-T – have lost an average of 46 per cent since going public in Toronto during the pandemic. Shares of the fifth, Nuvei Corp. NVEI-T, have climbed 33 per cent since its IPO in September, 2020, yet have plummeted 74 per cent from their peak.
Share buybacks have become an incredibly popular tool for publicly listed companies in recent years. In the first quarter of 2022, the value of share repurchases by S&P 500 Index companies hit a record high of US$281-billion, according to S&P Global. And over the 12 months that ended that quarter, buybacks by index companies were worth nearly US$1-trillion.
Buybacks have become so common in the United States that there are concerns companies are too often taking short-term measures to boost their share prices instead of making long-term capital investments or giving employees adequate wage increases.
In Canada, buybacks are also common. The Big Six banks, for example, have routinely repurchased shares for years. Because they pay large dividends, buying back stock helps them to lower quarterly payouts – or at least offset the dividend hikes that investors have come to expect.
Canadian oil and gas companies have also embraced buyback programs of late because they are flush with cash from surging energy prices, but limited by ESG principles that impede energy exploration. Constrained, a growing number of energy producers are directing cash toward their own shares.
Eleven tech stocks set to shine in a rebounding market
Growth stocks, however, are not common candidates for share repurchases –particularly not those that recently went public and have small public floats, meaning the number of shares available for purchase on the open market is quite small. When a company goes public, it tends to list only a fraction of its total share count at first. If the share price rises, long-standing shareholders who bought in before the IPO sell stock and increase the public float.
VerticalScope, which specializes in running websites for communities of enthusiasts of a broad range of topics, including beekeeping, snowboarding, automobiles and fancy watches, announced its buyback this month. In an interview, chief operating officer Chris Goodridge said the company’s situation is a little different from others because VerticalScope has positive free cash flow, which means it has some excess cash to deploy as management sees fit.
Typically, VerticalScope uses its cash to acquire new sites. Lately, though, management has been frustrated by a decimated stock price that they felt “was just grossly undervalued,” Mr. Goodridge said. Before a recent rebound on the back of encouraging earnings, the company’s shares were down 66 per cent from their IPO.
Executives at Pivotree, which provides cloud and data management services, have a similar mentality. The company is normally keen to acquire competitors, but management has decided to redirect some of that cash toward repurchasing its own stock instead. “When our stock price is low, the potential rate of return on that stock is better than the acquisitions we have been looking at,” chief financial officer Moataz Ashoor wrote in an e-mail.
“As our stock price comes up and private company valuations begin to fall in line with public market multiples, the return profile begins to shift and it starts to make more sense to buy other people’s equity instead of our own,” he added.
However, there is no guarantee that buying back stock will boost a company’s share price. Nuvei, which specializes in electronic payments and made money last year, initiated its repurchase program in March and after one quarter it had bought back roughly US$100-million worth of shares at around US$62, on average.
Nuvei’s closed at US$34.50 on the Nasdaq exchange on Wednesday. Nuvei did not return a request for comment.
With reports from Sean Silcoff
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.
Tim Kiladze