Canadian Tech Companies Offer High-Potential Investment Opportunities
Written by Aditya Raghunath at The Motley Fool Canada
Tech stocks are volatile and can take investors on a roller-coaster ride, but holding the right companies can also allow you to build long-term wealth. Typically, tech stocks outpace the broader markets in a bull run and trail them significantly when sentiment turns bearish. These stocks have a high beta, which suggests you need to have a high-risk appetite to invest in technology companies.
The drawdown in TSX tech stocks in recent months provides you an opportunity to buy the dip and enjoy inflation-beating returns on the rebound. Here are three such Canadian tech companies that offer high-potential investment opportunities.
The largest TSX tech stock Shopify (TSX:SHOP) has surged 73% year to date. However, it’s still trading 62% below all-time highs. While top-line growth has decelerated in the last five quarters, Shopify increased revenue by 25% year over year to US$1.5 billion in the first quarter (Q1), outpacing consensus estimates of US$1.43 billion.
Shopify also disclosed it is in the process of selling its low-margin logistics business, allowing the company to focus on core growth initiatives.
In Q1, Shopify’s gross merchandise volume, or GMV, soared 15% to US$49.6 billion. This metric reflects the total amount spent on the Shopify platform, and the company now accounts for 10% of online sales in the U.S.
Part of a rapidly expanding addressable market, Shopify stock is priced at 11.5 times forward sales, which is quite expensive. But its improving profit margins and wide economic moat should allow SHOP stock to deliver outsized gains to investors.
Constellation Software stock
One of the top TSX stocks in the past decade, Constellation Software (TSX:CSU) has returned 2,000% to shareholders since May 2013. It primarily provides mission-critical software and solutions to public and private sector clients.
Over the years, Constellation Software has focused on acquiring profitable companies that provide enterprise-facing, mission-critical solutions, allowing it to build and manage a vertically integrated software business.
Its specialized offerings result in low switching costs, high retention rates, and stable cash flows across market cycles. While most tech stocks are reeling under pressure from macro headwinds, CSU stock is down just 4% from all-time highs.
Constellation Software increased sales by 34% to $1.91 billion in Q1, while free cash flow grew by more than 30% to $453 million. In the March quarter, Constellation Software spent $452 million on acquisitions, which should drive future cash flows higher.
Converge Technology stock
Down 75% from all-time highs, the final TSX tech stock on my list is Converge Technology (TSX:CTS), which is priced at a market cap of $688 million. Converge has increased sales from $688 million in 2019 to $2.1 billion in 2022. It’s on track to end 2023 with $2.6 billion in sales, which suggests it’s trading at a price-to-sales multiple of just 0.26.
While adjusted earnings are forecast to narrow by 20% this year, CTS stock trades at nine times forward earnings, which is very cheap.
Converge Technology provides IT and cloud solutions to enterprises in Canada and the United States. These solutions include application modernization, digital infrastructure, cybersecurity, advanced analytics, and digital workplace offerings.
CTS ended Q1 with a product backlog of $527 million — an increase of $48 million compared to Q4 of 2022.
Despite the pullback in share prices, CTS stock has returned 242% to shareholders since its initial public offering in May 2018.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.