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Buy these Canadian tech stocks for big returns, analysts say

TSXV Venture 50

Canada has had its share of tech flame-outs over the years, where names like Nortel and BlackBerry still bring up bad memories of too-good-to-be-true stocks that plummeted in value in dramatic fashion. And while tech in general has been a punching bag in the markets over the past couple of years, the sector has seen some life in 2023, including with Canadian names. 

Investors looking for that next gear have a number of Canadian technology stocks to choose from, starting with these four, all of which have recent Buy or Buy-equivalent ratings from analysts.

We start with Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials NYSE:SHOP), the e-commerce champion and home-grown success story which in some ways mirrored the rise-and-fall of the just mentioned tech names. SHOP delivered 10x returns for early investors, as the company spread its wings and its platform dominated in the online small- to mid-sized business/entrepreneur category. But post-pandemic blues have seen slower momentum for the company and investors fled in droves, dropping the stock about 80 per cent in the span of a couple of months.

But there are lots of reasons to get back on the Shopify bus, according to National Bank Financial analyst Richard Tse. Tse reviewed the company’s latest quarterly results in a May 4 report where he reiterated an “Outperform” rating on SHOP while raising his target price from US$60 to US$80 per share, good at the time of his report’s publication for a 36 per cent projected return.

Tse said Shopify showed strong year-over-year growth in its Merchant Services segment, which had revenue up 31 per cent in its first quarter 2023. As well, Tse said Shopify’s decision to sell its fulfillment network was likely the right move as the business had become an increasing financial burden.

“We continue to believe Shopify is in the early stages of a market that’s structurally changing. We believe Shopify remains a leading on and offline Commerce disruptor and believe upside in the stock will come from a number of different incremental growth drivers such as: 1) International; 2) increased take rate with new services; 3) large enterprise (Shopify Plus); and now 4) POS for SMB retail,” Tse said in his report.

Another heavyweight of the Canadian technology space is Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU), a software solutions company which has a clear acquisition strategy in buying up small and niche vertical software companies. The plan has worked for years and shows little sign of slowing down, with investors showing their support, as the stock has been a winner for well over a decade.

National Bank’s Tse also favour’s CSU, saying in a May 16 report that valuations are looking good for acquisitions for Constellation and the company has been posting positive organic growth, as well. The company’s solid recurring cash flow base is also a key defensive attribute for investors to appreciate in the currently volatile climate.

“With ~$1.6 billion in available liquidity, a low leverage ratio (Net Debt/EBITDA) of 0.6x and more attractive valuations, we think the deployment target to the implied consensus is achievable with a robust pipeline of over 40k potential targets,” Tse said.

“We believe that will require larger deals like the recent (large) acquisitions of WideOrbit and Allscripts’ Healthcare Assets (renamed Altera) that have come with those lower hurdle rates allowing for the pursuit of those larger deals given the heightened level of competition. Notably, during Constellation’s Annual Shareholders Meeting (on May 8, 2023), management stated that it is increasingly being invited to the table for larger deals,” he wrote.

Tse reiterated an “Outperform” rating on CSU and $3,000 target price, which at press time represented a projected return of 14.2 per cent.

Another Canadian name that’s been nothing but net for investors over the past decade-plus is Descartes Systems Group (Descartes Systems Group  Stock Quote, Charts, News, Analysts, Financials NASDAQ:DSG), a SaaS-based logistics solutions provider, whose share price is up by about a third over the past 12 months.

One Descartes supporter is Laurentian Bank Securities analyst Nick Agostino, who sees tailwinds continuing to support DSG’s business in the current macro environment. 

“Three drivers continue to support DSG’s sales performance including: 1) Data content, driven by screening and the Ukraine war; 2) Transportation Management Service (TMS), driven by demand for real time data and MacroPoint; and 3) E-commerce, with volume activity in-line with seasonality. Of note, since the FQ4 call on March 2, the US$ appreciated against the £, € and C$, and based on sales weightings, we estimate a potential sales headwind of ~1% or ~US$2M along with a slight negative impact on EBITDA given natural hedges,” Agostino wrote in a May 23 report.

Agostino maintained a “Buy” rating on Descartes and US$85 target price, which represented at the time of his report’s publication a one-year return of 8.4 per cent.

Lastly, we have another Canadian e-commerce company in Montreal-based Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials NASDAQ:LSPD), which, like Shopify, was thrown for a huge loop in the back half of 2021 and into 2022. Unlike SHOP, however, LSPD has yet to mount a comeback, but Eight Capital analyst Adhir Kadve has faith in the stock and company.

Kadve stuck with a “Buy” rating in a May 19 report, saying that the company’s recent decision to create a unified Payments and point-of-sale strategy should pay off in the end, although profitability may be impacted over the short term.

“In our view, the initiative will require meticulous execution from Lightspeed and ultimately should result in significant acceleration of Payments adoption and profitable growth ahead for the company, with management targeting a ‘Rule of 40’ business exiting the FY,” Kadve wrote.

With his update, Kadve lowered his target price on LSPD from US$26 to US$18.50, which at press time represented a one-year projected return of 42 per cent.

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