Over the past five years, the Canadian tech sector has annualized returns of just shy of 18% (this number comes from XIT, a Canadian technology exchange-traded fund). This is despite a massive correction in late 2021 and 2022 that saw many top Canadian tech stocks, along with the ETF XIT, take 50% or greater hits to share prices.
This 18% annualized growth would have turned a $10,000 investment into nearly $21,000 in just half a decade. We're saying here that tech companies, especially in Canada, are booming right now. This is precisely why we decided to come out with this list of the best-performing technology stocks in Canada.
But even though the Canadian tech sector is booming, people usually head to the United States when looking for the best tech stocks to buy. So why is that?
Tech stocks just aren't as prevalent on the Toronto Stock Exchange
The I.T. sector accounts for nearly a quarter of the S&P 500.
Recently, the major indices underwent a sector reshuffle. However, technology still accounts for 24.6% of the index. It is almost double that of the second-largest sector.
However, Canadian stocks in the technology sector accounted for only a single-digit weighting of the TSX Index, Canada's main stock index.
As you can see, the lack of Canadian tech companies on the TSX has hampered the overall performance of the Canadian markets.
The good news? The lack of performance can lead to a lack of awareness. Thus, comes opportunity. Even though the TSX's I.T. sector is small, plenty of suitable investments exist.
The U.S. has its FAANG (Facebook (now Meta Platforms), Amazon, Apple, Netflix, Alphabet (Google)) stocks, but did you know Canada has its acronym of tech all-stars?
Ryan Modesto, chief executive of 5i Research, coined the acronym "DOCKS" to reference Canada's own FAANG stocks.
The five stocks include
- Descartes Systems (DSG)
- Open Text (OTEX)
- Constellation Software (CSU)
- Kinaxis (KXS)
- Shopify (SHOP)
A well-balanced portfolio should have exposure to the I.T. sector, and you don't have to go south of the border with U.S. tech stocks to find it.
Are rising interest rates bad for tech stocks?
One of the main reasons technology stocks faced such a significant correction in late 2021 and 2022 was because of the threat of higher interest rates.
As rates go up, it ultimately costs companies more money to borrow. As a result, weighted average costs of capital go up, which can reduce the amount you theoretically should pay for a company. This is especially true in the technology sector as it often contains fast-growing, unprofitable companies.
As a result, many price targets, recommendations, and growth estimates were slashed on popular technology companies, and the NASDAQ officially entered a bear market with losses exceeding 25%. Even tech giants like Apple (AAPL), Microsoft (MSFT), and semiconductor company Nvidia (NVDA) saw massive decreases in price.
While it is true that technology companies will likely not perform as well as they did at the peak of the pandemic, interest rates will likely remain exceptionally low, which bodes well for technology stocks moving forward.
Rising rates are an issue yes, but far from a situation where we need to be sounding the alarms.
What are the best tech stocks to buy in Canada?
- Nuvei (TSE:NVEI)
- Kinaxis (TSE:KXS)
- Descartes (TSE:DSG)
- Enghouse Systems (TSE:ENGH)
- Shopify (TSE:SHOP)
Nuvei (TSE:NVEI) is one of Canada's newest IPOs. The company went public in September 2020, and its share price performed exceptionally well until its recent correction.
Before listing, Nuvei was the country's largest privately held fintech company. The company provides payment-processing technology for merchants. Its suite of products serves both online and in-store transactions and counts Stripe, Paypal, Fiserv, Lightspeed Commerce, Global Payments, Shift4 Payments, and WorldPay among its competitors.
Since going public, the company has attracted plenty of attention. 16 analysts are covering the company – 4 rate it a "buy," six an "outperform," and four a "hold." Regarding price targets, most analysts have placed them 100% higher than the $42~ it's trading at the time of writing.
The company finally turned profitable in 2021, posting earnings per share of $0.91, and moving forward is expected to grow earnings to $2.90 in 2023. This is some large-scale growth, which is precisely why Nuvei continues to garner more attention from the investment world.
However, it is essential to note that newly listed companies carry additional risks. Can it meet high estimates? And, can it shake the stigma of a nasty short report issued on the company in late 2021, even nearly two years later? We think so, but it will likely get bumpy along the way.
New listings are particularly vulnerable to performance as compared to expectations. Given this, IPOs like Nuvei are most appropriate for investors with a higher risk profile.
After a very long time of providing rock-solid returns, Kinaxis has had a couple of rough years. Amid the COVID-19 pandemic, the company's share price soared to over $210 but has taken a 25%+ hit since.
Why the popularity during the pandemic? Kinaxis' crown jewel is RapidResponse, a cloud-based subscription software for supply chain operations. Not surprisingly, demand for reliable supply chain management software was at an all-time high as the world screeched to a halt.
Globalized companies are dealing with complex issues, more so as COVID-19 mitigation efforts continue to impact the economy today. Even in early 2023, China just let go of lockdowns. Economic and border shutdowns are causing havoc, and platforms such as RapidResponse are essential in minimizing supply chain disruptions.
On the flip side, the pandemic has negatively impacted legacy customers. Some were unable to renew contracts or deferred projects. The good news is that the company is winning more business than it is losing, and the world is continuing to move forward from the pandemic.
One of the previous knocks on the company was the lack of diversification. But, the company is currently working hard to reduce this.
Regarding performance, Kinaxis put up high growth in 2020, cracking $300M in revenue for the first time. However, to close out 2021, the company reported revenue of only $314M. There was a slowdown in the utilization of its products, and tough year-over-year comparables have dragged the company down.
However, forward-looking growth is expected to be outstanding, as the company is estimated to grow earnings and revenue at a mid-double-digit pace for the next two years.
Kinaxis is still expensive, but historically this company has always commanded a relatively high valuation.
Much like Kinaxis, Descartes (TSE:DSG) benefits from a complex and globalized supply chain. Descartes is a global provider of federated networks and global logistics technology solutions. It provides a full range of logistic and web solutions that connect trading partners. Descartes has more than 20,000 customers across 160+ countries.
Descartes operates the world's most extensive multi-modal and neutral logistics network with high-profile partners, including UPS, Home Depot, and Air Canada.
The company's addressable market is estimated to be worth more than US$4 trillion as companies and governments prioritize logistics.
Regarding reliability, Descartes has been one of the most consistent tech stocks on the TSX Index. Over the past five years, the company has grown earnings at a double-digit rate annually; over that time, the stock has returned more than 198%. What can investors expect moving forward? Much of the same. Analysts expect the company to grow earnings by approximately 20%~ annually over the next couple of years.
The company is laser-focused on higher-margin service revenues and transitioning existing clients from its legacy license-based structure to its services-based structure. Furthermore, the company is a serial acquirer. Since 2014, the company has made significant acquisitions, nearly totalling $1B USD.
The pandemic was a challenging environment in terms of acquisitions. However, the company should be able to start acquiring more companies as we move to an endemic stage.
Enghouse Systems (TSE:ENGH)
Arguably the most underrated stock on this list, Enghouse Systems (TSE:ENGH) has been among the top-performing technology stocks for the past decade. But it's currently running into issues that make it a contrarian play. But, more on that later.
The company is among the least-followed and known on this list, yet it has quietly outperformed some more prominent names. It develops enterprise software solutions for a range of vertical markets. In 2020 and 2021, it benefitted from the pandemic because its products work well in a remote work environment.
A surge in growth in 2020 has left the company with some tough year-over-year comparables and is part of its recent struggles. However, given many companies have now made work from home a permanent option for staff, Enghouse is ideally situated to benefit in the long term.
So, why is Enghouse a solid long-term option and somewhat of a contrarian play right now? The company primarily grows via acquisition. And, unless you were living under a rock, tech stocks saw a significant and unsustainable runup in 2020 and 2021.
This left Enghouse with two options. Either overpay for acquisitions now or sit on a large cash balance. It chose to do the latter, and growth is slowing significantly. Management refuses to overpay for assets, so investors lost patience and dumped their shares.
However, over the long term, prudent management will likely be positive. And, many investors may not see the forest for the trees.
Case in point, the company started to deploy capital in 2023, so its share price has soared.
It could be a wise contrarian play if you believe in a rebound and the fact that Enghouse will continue to put its large cash balance to use to drive net income and cash flow growth.
Enghouse is uniquely positioned as a growth and income stock, a rarity in the tech industry. Although the company trades at expensive valuations, it always has and deserves a premium, given its strong performance.
The rise and fall of Shopify (TSE:SHOP) has undoubtedly been one for the record books. In November of 2021, if you had invested $10,000 in Shopify's IPO you would be sitting on returns of $700,000—a 70-bagger in a little over six years. However, fast forward to its recent capitulation, and your return would have shrunk to only $165,000.
It seems strange to complain about a 16-bagger. However, considering the returns that have been erased in not even a year, it's justified for investors to feel this way.
However, I wouldn't be giving up on Shopify just yet. It remains the biggest tech company in the country and may be poised for a rebound.
Shopify is an e-commerce platform that primarily sells to small and medium-sized businesses, particularly retailers. It has two primary segments, subscription solutions and merchant solutions. To explain the company's business model in the easiest way possible allows business owners to set up an online shop and start collecting sales very quickly.
So, you can see why Shopify's business model proved to be critical to business owners during the pandemic and is one of the main reasons for its meteoric growth over that timeframe.
Shopify has grown from just $115M in revenue in 2014 to $7.2B at the end of its Fiscal 2022. The company also turned profitable and cash flow positive in 2020 and is heading into its second growth cycle stage. Analysts have slashed forecasts and expect revenue of $9B this year, followed by $11B in 2024.
This is still exceptional growth. The difficulty with Shopify during the peak euphoria of the pandemic was valuation and the accuracy of its forecasts, which is why we witnessed a significant drop.
However, now that the company has corrected, valuations are starting to look solid. It is trading at around nine times EV/Revenue, which is still a premium to the industry averages. Although Shopify's growth trajectory has been reduced significantly, it still deserves a premium multiple in the industry.
As a result, we view it as a very solid tech stock to look into in this environment.
Interested in a little more stability rather than growth? Check out the top Canadian telecom stocks.