Top Canadian tech stock picks for 2024 from RBC

It perhaps doesn’t feel like it, but 2023 was a great year for the Canadian tech sector, with the S&P/TSX Info-Tech sector returning 69 per cent.

Why does it not feel like it was a great year? Well, there’s a very good reason for that, explain RBC analysts Paul Treiber and Maxim Matushansky, who in a report to clients January 11 say most of the gains were made by two stocks, namely Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) and Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU).

As reported by the Globe and Mail today, the analysts say 2024 should be a year in which the wealth is more broadly shared across the entire tech sector.

“The S&P/TSX Info-Tech sub-sector delivered a total return of 69 per cent in 2023, which was the best performing sub-sector in the S&P/TSX Composite and the highest return for the sub-sector since 2020,” the pair wrote. “While we believe the S&P/TSX Info-Tech sub-sector is unlikely to repeat the performance of 2023, we expect a solid year. We believe healthy returns are likely to be more widespread across Canadian tech stocks in 2024 than 2023, given: 1) valuation multiples for many Canadian tech stocks may rise in 2024; 2) organic growth and profitability may improve through 2024; and 3) the Consolidators are likely to continue to create shareholder value.”

Treiber and Matushanksky say the best of the rest in the space have become cheap stocks, by several metrics.

“Our view that valuation multiples for most Canadian tech stocks may rise in 2024 reflects: 1) valuation multiples for Canadian tech are below historical averages; 2) risk-free rates may decline in 2024; and 3) visibility to growth stabilization and/or improving profitability may improve,” they said. “The valuation of the average stock in our coverage universe is 8 per cent below its 10-year average and 20 per cent below its 5-year average. In comparison, the valuation of the S&P 500 Tech sub-sector is 40 per cent above its 10-year average and 21 per cent above its 5-year average. Moreover, the median stock in our coverage universe is trading 43 per cent below its peer group, which is steeper than the historical discount of 31 per cent. Regarding interest rates, we estimate a 100 basis points decline in the 10-year U.S. Treasury yield would equate to a 17-per-cent increase in the DCF valuation of the average stock in our coverage universe.”

RBC’s top five tech stocks for 2024 include the aforementioned Shopify and Constellation Software and are joined by a familiar trio which have all earned “outperform” ratings at the bank. They are Kinaxis (Kinaxis Stock Quote, Chart, News, Analysts, Financials TSX:KXS), with a price target of $220, Open Text (Open Text Stock Quote, Chart, News, Analysts, Financials TSX:OTEX), with a (US) $53 target and Calian Group (Calian Group Stock Quote, Chart, News, Analysts, Financials TSX:CGY), with a $65 target.