The Top Canadian Tech Stocks to Buy in December 2024

In the last half decade, Canada’s technology sector has experienced annual returns nearly reaching 16%. This figure is derived 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 16% annualized growth would have turned a $10,000 investment into nearly $21,000 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 top technology stocks to buy in Canada.

What are the best tech stocks to buy in Canada?

Of note, the table of top technology stocks below is in no particular order.

• Lightspeed Commerce (TSE:LSPD)
• Kinaxis (TSE:KXS)
• Descartes (TSE:DSG)
• Constellation Software (TSE:CSU)
• Shopify (TSE:SHOP)

Lightspeed Commerce (TSE:LSPD)

Going public in mid-2019, Lightspeed Commerce (TSE:LSPD), 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 for golf.

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 performed exceptionally well. It is important we don’t associate a euphoric market environment with a poor company.

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 $920M 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.

Kinaxis (TSE:KXS)

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‘ (TSE:KXS) 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. Over the last 3 years, the company has doubled its revenue and free cash flow per share.

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.

Descartes (TSE:DSG)

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 free cash flow per share by 120%, and revenue has nearly doubled.

What can investors expect moving forward? Much of the same. Analysts expect the company to grow earnings by approximately 15%~ 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, and continued acquisitions in the future should help fuel growth.

The pandemic was a challenging environment in terms of acquisitions. However, the company should be able to start acquiring more companies as we’re well beyond the pandemic now.

constellation software (TSE:CSU)

Constellation Software (TSE:CSU) mystifies some investors. The company has historically commanded an eye-watering premium in terms of valuations, however it continues to be one of the best performing technology companies in North America, let alone Canada.

Investors have a very difficult time valuing this business and even understanding what it does. At its core, Constellation specializes in acquiring, managing, and building software businesses, primarily Vertical Market Software (VMS) businesses.

These businesses provide specialized software solutions tailored for specific industries or “verticals,” such as healthcare, public administration, education, transportation, and real estate. The niche software platforms do two things. For one, they have sticky renewal rates primarily because they are so specialized for a specific sector.

And secondly, they’re concentrated enough that larger software companies will likely overlook them due to their small addressable market. As a result, the company targets small to medium-sized VMS companies that have strong customer bases but may not be growing rapidly or attracting significant attention from larger software companies.

The high barrier to entry in the businesses and low customer churn creates a very stable form of cash flow generation, allowing Constellation to spend even more on further acquisitions. Many investors like a dividend snowball. Think of Constellation as a cash-flow snowball. The more businesses it acquires, the larger and larger it gets and the more money it has to spend on future acquisitions.

The company is led by one of the best management teams on the planet, and there is little doubt they’ll fail to execute in the future.

Shopify (TSE:SHOP)

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, the stock has given back more than half of its gains at the peak of the pandemic.

It seems strange to complain about a 26-bagger. However, considering the returns that have been erased from those who bought at the top, I can see the frustration.

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 $10.5B at the time of update. The company also turned profitable and cash flow positive in 2020 and is heading into its second growth cycle stage. Analysts now expect 20%+ revenue growth and more than 30% earnings growth over the next few years.

This is 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 12 times EV/Revenue, which is still a 50% discount from the company’s 5 year 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.

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.

However, Canadian stocks in the technology sector accounted for only a single-digit weighting of the TSX Index, Canada’s main stock index.

We simply don’t have enough technology options in Canada, as our economy is primarily focused on “real economy” stocks like utilities, railroads, telecoms, and oil producers.

As a result, many investors head south of the border to gain exposure to technology. However, they’d have missed out on the exceptional returns from companies like Shopify, Constellation, and Descartes.

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 2024 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.