The Top Canadian Tech Stocks to Buy in December 2022

Posted on November 16, 2022 by Mathieu Litalien

Over the past five years, the Canadian tech sector has annualized returns of just shy of 17% (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 17% annualized growth would have turned a $10,000 investment into nearly $22,000 in just half a decade. What we're trying to say here is tech companies, especially in Canada, are booming right now. This is exactly 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 IT sector accounts for over a quarter of the S&P 500.

Recently, the major indices underwent a sector reshuffle, however, technology still accounts for 24% 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 IT sector is small, there are plenty of good investments.

The U.S. has its FAANG (Facebook (now Meta Platforms), Amazon, Apple, Netflix, Alphabet (Google)) stocks, but did you know Canada has its own 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 IT sector and you don’t have to go south of the border with US tech stocks to find it.

I forgot to mention, that we're continually identifying popular tech stocks for Premium members over at Stocktrades Premium. In fact, we're highlighting some of the best opportunities in the country on a monthly basis, and live via our Discord server.

Interested in Stocktrades Premium? Just click here to unlock a huge discount.

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, in turn, 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 20%. 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 are likely not going to perform as well as they did at the peak of the pandemic, interest rates will likely still 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)

Nuvei Logo

Nuvei (TSE:NVEI) is one of Canada’s newest IPOs. The company went public in September of 2020 and its share price had performed exceptionally well up until its recent correction.

Prior to listing, Nuvei was the largest privately held fintech company in the country. 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. There are 16 analysts covering the company – 3 rate it a “buy”, 6 an "outperform" and 5 a “hold”. In terms of price targets, most analysts have placed them 100% higher than the $40~ its trading at 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 $2.36 in 2022 and $2.90 in 2023. This is some large-scale growth, which is exactly why Nuvei continues to garner more attention from the investment world.

It is important to note, however, that newly listed companies carry additional risk. Can it meet lofty estimates? And, can it shake the stigma of a nasty short report that was issued on the company in late 2021? We think so, but chances are it's going to get bumpy along the way.

New listings are particularly vulnerable to performance as compared to expectations. Given this, IPOs such as Nuvei are most appropriate for investors with a higher risk profile.

Kinaxis (TSE:KXS)

Kinaxis

After a very long time of providing rock-solid returns, Kinaxis has had a couple of rough years. In the midst of the COVID-19 pandemic, the company's share price soared to over $210 a share, but has taken a 33%+ 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 are continuing to have an impact on the economy today. 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.

In terms of performance, Kinaxis put up lofty 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 definitely a slowdown in the utilization of its products and tough year-over-year comparables have dragged the company down.

Given this, it's not surprising it has pulled back. This is not a stock that should be trading at the same levels as hyper-growth stocks which are generating growth of 50% annually. But, the recent dip in price could provide an opportunity, as it is already starting to recover.

The company is expected to return to strong growth in 2022 and 2023, with double-digit top and bottom-line growth expected. Kinaxis is still expensive, but historically this company has always commanded a relatively high valuation.

Descartes (TSE:DSG)

Descartes

Much like Kinaxis, Descartes (TSE:DSG) is benefiting from a complex and globalized supply chain. Descartes is a global provider of federated network and global logistics technology solutions. It provides a full range of logistic and network solutions that connects trading partners. Descartes has more than 20,000 customers across 160+ countries.

Descartes operates the world’s largest 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 place top priority upon logistics.

In terms of 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 and over that time, the stock has returned more than 160%. 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 the higher-margin service revenues and on 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 a significant amount of acquisitions, nearly totaling $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)

Enghouse dividend

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 some issues that make it a bit of a contrarian play. But, more on that later.

The company is one of the least-followed and known on this list, yet it has quietly outperformed some of the bigger names. It develops enterprise software solutions for a range of vertical markets. In 2020 and 2021, it benefitted from the pandemic because of its products that work well in a remote work environment.

In fact, a surge in growth in 2020 has left the company with some pretty 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 strong 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, you know that tech stocks saw a significant and quite frankly 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 as such growth is slowing in a big way. Management simply refuses to overpay for acquisitions and as a result, investors are losing patience and selling.

However, over the long term, management being prudent is likely to be positive. And, many investors may not see the forest for the trees. So, if you believe in a rebound and the fact that Enghouse is eventually going to put its large cash balance to use to drive net income and cash flow growth, it could be a wise contrarian play.

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 given its strong performance, is deserving of a premium.

Shopify (TSE:SHOP)

Shopify Logo

The rise and fall of Shopify (TSE:SHOP) has certainly 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 6 years. However, fast forward to its recent capitulation and your return would have shrunk to only $140,000.

It seems strange to complain about a 14-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, it gives business owners the ability to set up an online shop and start collecting sales, very easily.

So, you can see why Shopify's business model proved to be absolutely 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 $5.8B at the end of its Fiscal 2021. The company also turned profitable and cash flow positive in 2020 and is heading into the second stage of its growth cycle. Analysts have slashed forecasts and are now expecting revenue of $7.2B this year followed by $9B in 2023.

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. In fact, it is trading at around 7 times EV/Revenue, which is only a small premium to the industry averages. Considering Shopify's growth trajectory, although it has been reduced significantly, it still deserves a premium multiple to 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.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.

[class^="wpforms-"]
[class^="wpforms-"]
[class^="wpforms-"]
[class^="wpforms-"]