Best Canadian Tech Stocks

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Technology is currently the most relevant investment narrative in the world. Over the past 15 years, major technology conglomerates have dominated the stock market, replacing traditional conglomerates and banks to become the most significant sector by market capitalization worldwide. In addition, software companies have grown exponentially over the past decade due to the increasing digitization of products/services and the broad applications of software across various industries.

Technology stocks have far outpaced traditional companies in growth due to the scalable nature of their products and wide applications, particularly in software. Some of the hottest sectors in software include enterprise software, cloud computing, artificial intelligence, digital payments, and digital content. On the other hand, hardware companies have also grown spectacularly due to the ever-increasing demand for smartphones and computers.

However, investors should beware that the long-term success rate in the technology sector is shallow due to intense competition and short lifecycles of companies compared to traditional sectors. Also, tech companies are often loss-making in the early years due to customer acquisition efforts and the time they take for their markets to mature. That being said, the technology sector has been the biggest wealth creator for investors over the past decade, and the sector has massive growth prospects ahead of it.

Two primary choices are available to investors who want to invest in technology, the first being a direct investment in technology stocks. The second is an investment in technology-themed ETFs and mutual funds.

The Best Tech Stocks in Canada –

Shopify (TSE: SHOP)

Sector – E-Commerce

Shopify has been one of the biggest wealth creators of the past decade. Shopify debuted publicly in 2015, and its IPO opened at about C$18. Today, the stock trades at C$1987, representing a 110x gain in just under six years. This means a C$10000 investment would be worth less than C$1 million today.

Shopify is an e-commerce service company that lets individuals and small/medium businesses set up online businesses without hassles. Shopify takes care of payments, store setup, and inventory management and offers many other features to customers looking to start an online business.

The company operates on a subscription model. The subscription model gives the company consistent and predictable revenues and spreads costs and R&D expenses across many users. At the same time, payments and merchant fees allow it to grow with its users as these fees are proportional to gross merchandise value. The company’s most significant source of revenue is payment processing fees and merchant fees, followed by subscriptions. The pandemic was a heaven-sent opportunity for the company as small and medium businesses worldwide were forced to shift online due to lockdowns and social distancing. As a result, its stock has been up nearly 500% since last March.

In Q1, Shopify reported revenues of $988 million, up 110% YoY. In addition, the company reported merchant and payment revenue of $668 million (up 137% YoY) and subscription revenue of $320 million (71% YoY). Adjusted EBITDA for the quarter was $210 million, and net income was $1.258 billion due to abnormal gains. However, adjusting for the one-time gain, the net income was $254 million.

Shopify is a must-buy for investors due to its sector’s bright future and excellent record. In addition, the company’s unique business model of stable revenue from subscriptions and customer sales growth due to merchant services makes it an outstanding growth stock.

Check Out: Augmented Reality Stocks Canada

Kinaxis (TSE: KXS)

Sector- Enterprise Software

Kinaxis is an enterprise software-as-a-service company. The company’s software runs entirely on the cloud, making it accessible to any customer, and uses artificial intelligence for supply chain management. Due to COVID accelerating the already rapidly growing e-commerce and logistics space, the company has an excellent tailwind behind it.

The company’s software gives customers a completely integrated supply-chain management system that uses artificial intelligence to drive efficiency, lower costs, and give customers more control over their supply chains. Kinaxis’ software is sector-agnostic and has applications in various sectors, including defence, FMCG, electronics, and e-commerce.

In Q1, the company reported a revenue of $57.7 million, up 9% YoY, EBITDA of $9 million, up 16% YoY, and a net loss of $1.5 million due to abnormal items. Cash Flow generation was $20.6 million.

The stock has been a massive wealth creator since its IPO in 2014, debuting at C$13. Today, the stock is trading at C$163, representing a gain of 1250% in just seven years.

Docebo (TSE: DCBO)

Sector – Enterprise Software

Docebo is an upskilling platform designed for large organizations. Due to the large-scale digitization of products/services and a disruptive landscape, large organizations must change how they work, creating an enormous need for upskilling and re-skilling. Furthermore, the company also got a tailwind from COVID-19. Many companies now work from home and hire online, creating remote upskilling.

Docebo uses its cloud-based AI platform to create and deliver specialized content to existing or new customers. The company’s software uses AI to monitor employees’ progress and tests them on what was learned, all in an automated fashion. This is far more efficient and faster than traditional upskilling. As a result, the company has an excellent market fit, as seen by its rapid growth. The company grew its user base by 27% just last quarter.

In Q1 2021, the company reported revenue of C$21.7 million, up 61% YoY, EBITDA of C$19.7 million, up 3% YoY, and a net loss of C$5.6 million due to focus on growth. In addition, the company reported an annual recurring revenue growth of 60%.

The stock has done very well for investors since its IPO in October 2019, debuting at C$13.6. Today, the stock trades at C$80, representing a gain of about 600% in just under two years.

LightSpeed POS (TSE: LSPD)

Sector – Payments and Digital Retail

LightSpeed POS is a Canadian software-as-a-service company. The company provides its customers with a one-stop shop for digital retail. The company’s software offers employee management, inventory management, payment, and e-commerce solutions. Over the past year, the company has been a winner due to the pandemic giving its business a massive tailwind.

LightSpeed’s inventory management system aims to provide customers with a one-stop, easy-to-use inventory tracking system. As many businesses have shifted online over the past few years, the demand for digital retail software has skyrocketed. The company helps businesses with complex product portfolios and large numbers of products keep track and manage inventory and ensure that product logistics run efficiently. The company also has employee management features that help businesses create complex workflows encompassing hundreds of employees and tracking progress and performance. The company also provides performance tracking software that collates data from multiple points across industries and gives detailed performance reports in real-time to drive efficiency and awareness. The company also offers point-of-sale hardware for accepting payments from e-wallets, credit/debit cards, and phone payment gateways like Apple Pay and Google Pay.

In 2020, the company reported record performance with revenues of $221.7 million, up 84% YoY. Recurring and subscription revenue was $202.3 million, up 89% YoY. The company reported an adjusted EBITDA loss of $21.2 million and an adjusted net loss of $24.2 million. Even though the company is loss-making, it is gradually moving towards profitability. EBITDA loss lowered to 9.6% of revenue from 18% last year, and net loss reduced to 10.9% of revenue from 17.1% last year. Such trajectories are typical in the tech sector as companies pursue growth over profitability. However, when the companies break even, operating leverage’s effects kick in, and profitability grows rapidly.

The stock has been stellar since its IPO in 2019, debuting at C$18.9. The stock has returned 580% in under two years and is trading at C$110.

Constellation Software (TSE: CSU)

Sector – Enterprise Software

Constellation Software is an enterprise software company offering a software product portfolio for specialized markets. The company differs from traditional companies, focusing on a few core products or markets. The company has a bright future due to the increasing application of software to drive efficiency and lower the cost of operations, especially since the sectors it operates in have low competition.

Constellation operates on an acquisition model, where the company acquires small software companies or products with applications in niche sectors with low competition. The company then removes redundant functions such as accounting and marketing; these functions are then taken in-house by Constellation to increase profitability. The company has acquired over 500 businesses since 2006 and has made 24 major acquisitions. The growth-by-acquisition model removes R&D risk from the company’s perspective and unlocks synergies. However, their acquisition model has not been as successful of late due to competition from private equity and hedge funds.

The company has five broad businesses – Volaris, Harris Computer, Jonas Software, Vela Software, and Perseus Software. Volaris is the company’s acquisition vehicle and houses over 45 software products serving the financial services, education, and agriculture sectors. Harris Computer houses 31 products that cater to the public and government by providing software solutions for utilities, education, and healthcare. Jonas Software houses 70 products that cater to the hospitality and construction segments. Vela Software caters to industrial sectors such as gas, steel, and oil and has eight products under its umbrella. Lastly, Perseus caters to real estate, construction, and paper/pulp segments. The company generates most of its revenue from long-term contracts, most of which the government holds. They should capitalize on Canadian Semiconductor Companies.

In Q1 2021, the company reported revenues of C$1.176 billion, up 24% YoY, and an EBITDA of C$975 million, up 20% YoY. The company has been a great performer since its IPO in 2006, having returned 104x over 15 years. In the last five years, the stock has returned 263%.

Nuvei (TSE: NVEI)

Sector – Digital Payments

Nuvei is Canada’s largest payment processing company. The company provides its payments engine as a service to large multinationals, other tech companies, and small businesses to integrate into their systems. Like other companies on this list, Nuvei has been a significant beneficiary of the digital acceleration induced by COVID-19.

 The company offers customers 480 different forms of payment acceptance in 150+ currencies. Businesses can integrate their platform into several formats, such as in-store, online, and mobile applications. The company also has a marketplace product for e-commerce platforms that allows fast and secure seller onboarding and a complete payment solution to match buyers and sellers. Nuvei marketplace helps platforms build marketplaces in multiple jurisdictions by taking care of all local payment requirements, foreign exchange management, and local language availability and eradicating the need for businesses to open local bank accounts in foreign jurisdictions by facilitating cross-border payments. In addition, the marketplace product covers all KYC requirements for sellers and buyers. Other features include payment splitting and escrow.

In Q1 2021, Nuvei reported revenues of $149 million, up 80% YoY, an EBITDA of $67 million, up 127% YoY, and payments volume of $20.6 billion, up 132% YoY. Most importantly, the company turned profitable with a net profit of $27.8 million compared to a loss of $62.3 million in Q1 FY20.

Nuvei went public in September 2020 and debuted on the markets at $46 a share. Since then, the stock has been a stellar performer and has returned 124% in under a year, currently trading at $103.

Vancouver has plenty of mining and oil and gas stocks, but dividend payments – the technology stocks – could complement your portfolio based on your diversification needs. These five technology stocks should give you an idea of the opportunities deep in the TSX.

Technology ETFs in Canada

Technology-themed ETFs are an excellent option for risk-averse investors or those who do not want to invest directly in tech companies, as they are low-cost, liquid, and run by experienced fund managers. If you want to reduce the risk of investing in individual stocks over the long term and generate long-term wealth in the technology sector, the best tech ETF in Canada could be a step in the right direction. Here are a couple of the best technology ETFs –

BlackRock iShares S&P/TSX Information Technology Index ETF (TSE.XIT)

This ETF has 100% of its assets in technology companies and has an AUM of $543.9 million. Like cloud data storage stocks, Shopify, CGI IT, and Constellation Software are its most significant holdings. The ETF has been a stellar performer, with over 300% returns over the past five years.

The ETF offers investors a portfolio of Canadian technology stocks with a high dividend yield. In addition, the ETF tries to track the broad Canadian stock index, which measures Canadian companies that offer high dividends and returns.

Invesco QQQ CAD Index ETF (TSE:QQC-F.TO)

This ETF is designed to mirror the NASDAQ 100 index, which holds the biggest names in tech like Amazon, Netflix, Apple, Facebook, Microsoft, Tesla, etc., thus giving the investor exposure to the most extensive tech index worldwide and a diversified portfolio. The investor is also safe from foreign exchange risk as the ETF’s assets are hedged to the Canadian Dollar. The ETF has an AUM of $370 million and has returned 180% over the past five years.

As you can see from the stocks above, the wealth created by the technology sector has been unparalleled in any industry. The sector is poised for growth in the years to come because of its applications to every sector of the economy. Due to low interest rates and rising inflation, there has never been more reason to start investing savings in the stock markets. In today’s time, the technology sector is a key growth sector that deserves weightage in every investor’s portfolio.

Why Invest in Canadian Tech Stocks?

Investing in Canadian tech stocks offers a unique opportunity to tap into a rapidly growing and innovative sector. Canada’s technology sector is known for its strong ecosystem of startups and established companies, particularly in areas like artificial intelligence, clean technology, and digital media. The government’s supportive policies, including R&D tax incentives and grants, foster a conducive environment for tech companies to innovate and grow. Canada’s tech sector also benefits from a highly skilled workforce, thanks to its world-class educational institutions and attractive immigration policies for skilled workers.

Investors in Canadian tech stocks can gain exposure to emerging technologies and trends with global impact. The sector’s diversity, ranging from software development to telecommunications and biotech, offers various investment choices. Moreover, the Canadian tech market is often less volatile than its US counterparts, providing a more stable investment environment. The growth potential, coupled with the stability of the Canadian economy, makes investing in Canadian tech stocks an attractive proposition for those looking to diversify their portfolios and capitalize on the tech industry’s growth.

What are the major themes in Canadian technology companies?

  1. Artificial Intelligence and Machine Learning: Canada is a global leader in AI and ML, with cities like Toronto, Montreal, and Vancouver being key hubs. Canadian tech companies are at the forefront of developing innovative AI solutions across various sectors, including healthcare, finance, and transportation.

  2. Clean Technology: With a growing global focus on sustainability, Canadian tech companies are increasingly developing clean and renewable energy solutions. This includes advancements in battery technology, energy efficiency software, and sustainable resource management.

  3. Telecommunications and 5G Technology: Canada’s telecommunications sector is robust, with companies actively involved in developing and deploying 5G technology. This drives advancements in internet speed, connectivity, and the Internet of Things (IoT).

  4. E-Commerce and Digital Payments: The rise of online shopping has led to significant growth in e-commerce and digital payment solutions. Canadian tech companies are innovating in this space, offering secure and efficient online transaction platforms.

  5. Healthcare Technology: Canadian tech companies are making strides in healthcare technology, including telemedicine, digital health records, and personalized medicine. This is driven by the need for more efficient healthcare delivery and technology integration in medical treatments.

  6. Cybersecurity: As digital transformation accelerates, cybersecurity has become a critical concern. Canadian tech companies are developing advanced security solutions to protect against cyber threats, which is increasingly relevant in today’s interconnected digital world.

These themes highlight the dynamic and diverse nature of the Canadian tech sector, offering investors a range of opportunities to engage with cutting-edge technologies and innovative companies.