Over the past five years, the Canadian tech sector has annualized returns of just shy of 19% (this number comes from XIT, the TSX Capped Information Technology Index ETF). 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 $24,000 in just half a decade. 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% in 2022. Even tech giants like Apple (AAPL), Microsoft (MSFT), and semiconductor company Nvidia (NVDA) saw massive decreases in price.
However, fast forward to 2023 and those losses are all but gone, showing you that money is best invested in the markets for the long-term, and not in an attempt to time short-term fluctuations in price.
Are you too late when it comes to tech stocks in 2023? Certainly not. Lets have a peek at the best in Canada.
What are the best tech stocks to buy in Canada?
- Lightspeed Commerce (TSE:LSPD)
- Kinaxis (TSE:KXS)
- Descartes (TSE:DSG)
- Enghouse Systems (TSE:ENGH)
- Shopify (TSE:SHOP)
Lightspeed Commerce (TSE:LSPD)
Going public in mid-2019, Lightspeed Commerce, which was formerly called Lightspeed Point-Of-Sale (POS), provides an omnichannel SaaS platform that enables retailers to accept payments, manage operations, engage with their customers, and even book tee times.
The company has over $23B in transaction volume and serves over 500,000 locations. In addition to this, it is consistently expanding into new verticals. An example would be its tee time platform.
Many investors looking at Lightspeed right now will likely see the company trading significantly off highs witnessed during the pandemic and fear operational difficulties. However, Lightspeed has been performing exceptionally well the past year, and although growth is expected to come in a bit slower, valuations seem to have more than compensated for this.
Over 70% of the company's clients generate less than $500,000 in annual transaction volume. So, you could say that small businesses, particularly those in retail and hospitality, are the lifeblood of this company. However, the company is in a solid position if small businesses were to take a hit in the current environment.
The company has more than $1B in cash and zero debt on the balance sheet, which should allow the company to navigate a potentially harsh economic climate for small businesses.
It is currently trading at a large discount relative to its competitors and the industry averages, and although it's never guaranteed, once we have a bit more certainty about the economic climate, I could see this one heading back to trade inline or at a premium with the industry.
After growing at a rapid pace during the pandemic, the company is now scaling back and carving out a path to profitability, something investors are prioritizing now that sentiment has certainly shifted.
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.
Moving forward in a post-pandemic world, countries and companies are hyper-focused on making sure supply chain disruptions are mitigated. This is ultimately a tailwind for a company like Kinaxis.
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.
Despite the company having the stigma of benefitting solely from the pandemic, it has put up exceptional growth over the last few years. In fact, the company managed to raise revenues by over 50% in Fiscal 2022 when compared to Fiscal 2021. When we look to forward estimates, this double digit growth pace is expected to continue and analysts figure this company will compound earnings at a 20% or greater pace.
Valuations have often been an issue with Kinaxis, and it doesn't provide a dividend yield either. So, for some, this will be a company they have little interest in. However, if you're looking to get past the fact you'll have to pay a premium to own it due to its growth, it's certainly one you could add to a watchlist.
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 140%. What can investors expect moving forward? Much of the same. Analysts expect the company to grow earnings by approximately 10%~ 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 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 is certainly the contrarian play on the list at this point, as the company has went through a few struggles in the post-pandemic world that is making investors second guess its management.
However, valuations have come down in a significant way, and if you're looker for a cheaper, underdog company that could end up turning things around, keep an eye on Enghouse. 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 is finally starting to deploy capital in 2023. 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. It also pays a high 2% yielding dividend, and one that is growing at a double digit pace.
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 $260,000.
It seems strange to complain about a 26-bagger. However, considering the returns that have been erased in a little over 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 is in the midst of a large-scale turnaround.
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 $10.5B 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 13 times EV/Revenue, which is still a 50% discount from the company's historical averages. Although Shopify's growth trajectory has been reduced significantly and we cannot expect to trade directly at historical multiples, it still deserves a higher multiple than it has right now, in my opinion.
As a result, I 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.