While Canadian technology stocks have been some of the fastest growing stocks on the Toronto Stock Exchange over the last decade (especially during the pandemic), they are still a relatively small part of our investing ecosystem.
But when it comes to tech stocks in Canada, they only make up about 5-6% of our publicly traded stocks. (That’s according to the FTSE Canada All-Cap Index.) By comparison, our financials sector is about 33% of our market, and our energy sector is about 18%.
In the USA, tech stocks make up over 26% of their entire stock universe (as measured by market cap) – and that is by far the largest sector in that very diversified market.
While I have had a lot of success through long-term dividend-conscious investing, there is no denying that others have made money by investing in the technology sector.
By most definitions, the vast majority of tech stocks would fit more comfortably in the “growth” basket, then under the “value” definition, whereas the Canadian dividend kings generally tend to fall in the value investing category. Realistically, when talking about Canadian tech stocks, there are only a few big companies with established track records – and then an ever-evolving group of long shots.
Canadian Tech Stocks Performance Chart
This chart was created by Mike Heroux at Dividend Stocks Rock – our go-to source for Canadian investing information.
Top 6 Best Tech Stocks to Buy in Canada
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1) Constellation Software (CSU)
As Canada’s second largest tech stock (after Shopify), Constellation Software has been a powerhouse of tech brands over the last couple of decades. With 32,000 employees and a market cap of over $45 billion, this isn’t your usual “tech stock on the verge of breaking out” type of story.
Constellation Software is more a story of how a founder-run company has managed to create valuable expertise and synergies across many different geographical and technical markets, by making smart acquisitions and then improving efficiency. With returns in the 30% range since 2006, CSU has been a growth investing darling for a long time now.
The software behemoth has six major verticals that serve as a way of organizing the 700+ software brands that operate under their massive umbrella. While CSU does have operations around the world, its revenue is principally generated by its transactions in North America and Europe.
While there is no denying that an effective ability to use leverage to find value is a hallmark of many successful tech companies, Constellation has adopted a different approach over the years. By relying chiefly on free cash flow to fund their acquisitions, they may have grown at a slightly lower clip than some competitors, but it also has put them in a much better spot to weather a high-interest rate environment, and possibly even scoop up some attractively-priced acquisitions in a tech-stressed environment.
Even during a post-pandemic pullback of the “software eating the world” mentality, we see Constellation continue to raise their own high bar, with revenues growing nearly 30% year over year, and earnings up over 43%! That’s the kind of growth it takes to justify a lofty P/E multiple of 78.
Considering that it is a low-debt company that recently traded at multiples of over 100x, some experts think there is still time to get in on CSU’s long-term growth. While they do pay a dividend, the current yield is only .24%. It’s tough to have it both ways – if a company is going to go out and aggressively buy future growth opportunities – plus take on relatively small amounts of debt – it’s hard to also pay a substantial dividend.
2) Lightspeed POS (TSX: LSPD)
Up until 2020, Lightspeed was kicking butt. As an all-in-one solution for small- and medium-sized businesses (SMEs) who wanted to collect payment at the Point of Sale (POS), Lightspeed’s organic growth and growth by acquisition attracted a ton of investor attention.
Then the pandemic hit – and most folks figured that a company specializing in person-to-person interactions might be in for tough sledding… only for Lightspeed to prove them dead wrong. As part of the tech-driven bull market during 2021, Lightspeed stock went through the roof.
The company has numerous subsidiaries including Ecwid Inc., Vend, ShopKeep, iKentoo SA, and Kounta. It has a seamless work in with the SaaS platform, and sells the POS hardware SMEs need as well. It was founded in 2005, and was founder-ran until 2022. Headquartered in Montreal, the company has offices in New York, Ottawa, Amsterdam, and Ghent.
Following a brilliant run up to 2021, the ground underneath Lightspeed started shaking. A company named Spruce Point Capital decided to:
a) Bet that Lightspeed stock would go down (aka: short the stock)
b) Release a bunch of information that accused Lightspeed of presenting false information at numerous points in its development.
Lightspeed immediately responded saying that information released by Spruce Point had many inaccuracies, and pointed out the obvious conflict of interest. Obviously this caused many shareholders to grow nervous right around the time when a general tech sell off was about to occur as we entered 2022.
As a consequence of this sequence of events, Ligthspeed stock has dropped more than 80% from its all-time highs. Critics of the company cite the fact that company needs to produce more free cash flow ASAP, and claim that they overpaid for acquisitions in order to grow their market share.
That said, it doesn’t take a genius to figure out that as people come back to eat at restaurants, hit the links, and shop in person, a company that specializes in point of sale strategies is going to do a lot better! At its most recent earnings call the company stated that unlike other tech companies, they were planning to keep up their hiring pace in the next year, and were quite confident of both overall sales, and the ability to get to cash flow positive in the next 18 months.
With revenues up 50% year over year, and a relatively clean balance sheet to soak up any short term losses, Lightspeed is a great candidate for being an oversold stock. On the other hand, it has to prove that it can convert all that growth into long-term profits before many investors will extend their trust.
3) Open Text (OTEX)
Open Text is another Waterloo-based logistics and information management company. Dealing with businesses of all sizes, Open Text offers different ways for companies to optimize their supply chains and increase overall efficiency. It was founded in 1991, has roughly 15,000 employees, and has been on some dividend-investors radar screen for a while now due to their dividend growth policy.
The name of the game these days in terms of maximizing value from corporate assets is handling data, and using it to provide what people want. Companies that can help others do this are in high demand. When you also layer in digital security expertise on top of that cloud-based data experience – you’re looking at a company with very solid growth prospects.
Open Text has been aggressive in growth by acquisition, purchasing over 80 companies in the last ten years. Despite the aggressive spend, Open Text has a reasonable debt-to-equity ratio of just over one, and has a history of solid free cash flow. Dividend Stocks Rock guru Mike Heroux predicts the company will continue to grow its dividend by 12% per year in the short- and medium-term.
Of course, as with all things tech, the major threat to Open Text is massive American competitors. They are in a hyper-competitive industry, and while they have managed to ride the wave so far, there is danger in that level of competition.
All that said, those large competitors also make Open Text an attractive takeover target. With a P/E ratio of 27, the stock is currently valued much more conservatively than that of its peers, and the long-term confidence of the company is showcased by its willingness to pay a nearly 2.5% dividend.
4) Descartes Systems (DSG)
Descartes Systems is a supply chain solutions company based out of the Mecca of tech in Canada – Waterloo, Ontario. It is actually a fairly old company (maybe ancient by tech standards) having been founded in 1981.
The company is world-wide with operations across the entire planet, and has managed to scale by creating a sustainable advantage in the field of transitioning traditional logistics systems to more modern cloud-based solutions, as well as acquiring competitors at reasonable valuations.
Descartes currently has a market cap of $6 billion and has shown solid long-term growth. Its recent quarterly earnings call revealed that revenue was up nearly 18% year over year, and earnings were up an even-more-healthy 25%.
Investors clearly keep expecting the company to grow revenues and earnings at this pace, as the current P/E ratio of 68 means that you will pay a premium to own a piece of this quality company. Then again, this type of ratio is not uncommon for quickly growing tech stocks.
Recently the general tech sell off has hurt Descartes stock momentum, but also put a crimp in their business model to some degree. While I’m not sure the current valuation makes enough sense for me to jump in with both feet, I am encouraged by Descartes’ long-term stability, its positive cash flow (especially important for a tech company in today’s market), and its low debt levels.
5) Shopify (SHOP)
The elephant in the room when it comes to discussing Canadian tech stocks is Shopify (SHOP).
I mean really, there is SHOP – and then there’s everyone else.
The software giant was briefly Canada’s largest company by market cap as the tech darling of the pandemic (remember when online shopping was going to become “the only shopping”?) before crashing back to Earth. Here are just a few numbers to try and put this unique company into context.
- Share price is down 70% YTD
- Even with this low share price, it’s still by far the biggest tech stock in Canada with a market cap north of $60 Billion.
- Its total return since going public in 2015 is still over 1,250%!
- Nearly 1.6 million websites ran Shopify last year.
- Revenue is up nearly 16% year over year.
- Despite higher revenues, the company still lost over one billion dollars last quarter.
What a crazy company to try and place a value on! I mean, it was briefly cash flow positive, but truthfully, I don’t think anyone really knows just how much profit this company will produce when it fully matures.
Shopify quickly established a niche for themself as the “friendly alternative to Amazon” when it came to selling stuff online. It has heavily invested in both organic growth and acquisitions, and has created a really solid long-term competitive advantage with its creative new ideas and economies of scale.
All of that said, at some point investors get tired of “paying for potential” – and I’d say that we’ve pretty much reached that point. As one of the most heavily analyzed companies in the world, you can spend all day reading various takes about what this company should be worth, and if it is over- or undervalued at the moment.
I think long-term Shopify will continue to succeed as a company, and that its business model places it smackdab in the middle of the online retail growth trend. That said, as with everything in tech, the question is just what is the right price tag for this company that still has so much of its story left to write?
I intend to ignore the noise surrounding the recent stock split and wait to see how well Shopify is able to control costs now that CEO Tobias Lütke has admitted that they need to cut employees and look to get back to profitability sooner rather than later.
6) Kinaxis (KXS)
Kinaxis is another of Canada’s supply chain management software companies. It’s located in Ottawa, and was founded back in 1984. Obviously, with supply chain pressures being more intense than ever, the race for efficiency is going to provide strong demand for companies with solutions.
While Kinaxis’ growth has been excellent (with recent revenues up nearly 35% year on year), the company is just trading at a massive premium right now with a price-to-earnings multiple of over 500! Given that it’s only down about 10% over the last year, it has retained value far better than many of its Canadian tech peers.
While it’s reassuring to see that investors have strong faith in the company, it does represent a bit of a problem in terms of current value. While the company recent announced strong growth forecasts, the execution of these plans would have to be absolutely incredible to justify this current valuation.
That said, it’s certainly possible that this strong management team is able to pull it off. Afterall, the company just completed its fourth major acquisition since 2020 when it bought the Dutch company MP Objects NV. Kinaxis clients include major corporate behemoths such as Ford, Unilever, and Merck.
There are many out there who will tell you that Kinaxis is the best bet out of all of the Canadian tech stocks, but for me, its current valuation is “too rich for my blood” considering the much lower multiples available in similar software companies.
Best Canadian Tech Stock ETFs
If you want instant diversified exposure to the Canadian tech sector, the BlackRock iShares S&P/TSX Information Technology Index ETF (XIT) is probably your best bet.
Now, given the relatively small number of tech companies in Canada, I’d be more inclined to recommend the US or Global markets if you’re looking to “overweight” on the technology sector. There are several different tech stock ETFs in the US, but the most applicable one for Canadians would be the QQQ CAD Index ETF(QQC-F).
This ETF is the Canadian version of the QQQ Nasdaq-tracking index in the USA, and includes many of the biggest companies in the world today such as Alphabet (Google), Netflix, Meta (Facebook), Amazon, Microsoft, Apple, etc.
While there is a layer of withholding tax added to dividend distributions in this time of “US ETF inside of a Canadian ETF” structure, these tech stocks don’t offer much on the dividend side of things anyway, so it’s not like it’s a big sacrifice.
Final Word on Canadian Tech Stocks
When it comes to valuing and investing in Canadian tech stocks, I’m just not the right demographic. I like companies with long-term track records, lots of free-cash flow, and sustainable durable competitive advantage. Even better if I can find those type of companies at a discount – which is why I’m a fan of the Dogs of the TSX strategy.
With rising interest rates affecting discount tables, and low liquidity biting into the “growth at all costs” business models these tech companies pursue, I’m just a skeptic until proven otherwise.
Now that said, if we’re looking at the tech sector more broadly, I’m a big fan of the more mature US companies in the space. It’s just really hard to compare the US tech stocks given their massive scale and competitive moat, to our relatively small world of Canadian tech stocks.
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