Over the past five years, the Canadian tech sector has annualized returns of just shy of 25%. This is despite a massive correction in late 2021 and early 2022 that saw many top Canadian tech stocks take 50% or greater hits to share prices.
This 25% annualized growth would have turned a $10,000 investment into nearly $30,000 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 25.25% 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, Amazon, Apple, Netflix, 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, 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.
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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 rising 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 and growth estimates were slashed on popular technology companies and the NASDAQ officially entered a bear market with losses exceeding 20%.
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?
- Enghouse Systems
Nuvei (TSE:NVEI) is one of Canada’s newest IPOs. The company went public in September of 2020 and its share price has performed quite well.
As of writing, Nuvei’s share price is up by ~104% since it went public. Not a bad return for those who got in early. And, this is taking into account a severe correction in Canadian tech. At one point, Nuvei was almost up 300% from its IPO price.
Is the jump in price justified? When compared to the valuations that peers commanded, we felt that the company’s IPO pricing did not do the company justice.
As we discussed with Premium members, there was a price disconnect which offered an attractive risk to reward opportunity.
Prior to listing, Nuvei was the largest privately held fintech company in the country. The company provides payment-processing technology for merchants. Their 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 – 5 rate it a “buy”, 9 an "outperform" and 2 a “hold”.
The company finally turned profitable in 2021, posting earnings per share of $0.91, and moving forward is expected to grow earnings to $2.60 in 2022 and $3.40 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.
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 been relatively flat 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 have been 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.
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 224%. 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)
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, it could be a wise contrarian play.
Let’s put Enghouse’s long-term performance into further perspective, and forget the recent struggles in the pandemic. A $10,000 investment in the company a decade ago would be worth more than $65,000 today if you reinvested the dividends. Increasing Enghouse’s attractiveness, it is also one of the few tech-listed Canadian Dividend Aristocrats.
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.
What more can be said about Shopify (TSE:SHOP) that hasn’t already been said. It has been among our top tech stocks for years and is likely to go down as one of the (if not THE) most successful IPO’s this country has ever seen.
Since it went public in 2015, the company has returned 2750%! A $10,000 investment in the company would be worth $275K today.
We’ve mentioned the TSX30 a couple of times already. Can you guess which stock has topped the list?
Of course you can – Shopify is #1 with returns of 330% over the past three years. The pandemic has accelerated the adoption of e-commerce which has benefited Shopify in a big way, and it is becoming one of the most widely used platforms not only in North America but around the world.
During the tech correction in late 2021 and early 2022, there was worries that Shopify had maybe gotten ahead of itself. The stock dropped considerably in value, and it guided down to lower than forecasted growth. However, that doesn't exactly mean Shopify's growth is going to stop. In fact, many analysts and the company itself still have lofty 40% annual growth expectations.
If the company can continue to attract more brick and mortar businesses to its platform plus develop more tools and selling methods to make its online stores more "sticky" to merchants, it will continue to expand its economic moat and dominate the industry.
The company turned cash flow positive after being unprofitable in the first 6 years of its publicly traded lifespan and is likely to continue growing cash flow in the future. Although valuations are still rich, each time large corrections have happened with Shopify, it has proven to be a buying opportunity.
Interested in a little more stability rather than growth? Check out the top Canadian telecom stocks.