Tech stocks currently continue to dominate most investors’ mind share right now. Over the past two decades, a number of top large-cap technology companies have ouperformed, and largely driven, most of the indexes around the world. In Canada, that’s no different, particularly when an investor zooms out over a longer time horizon.
With that said, differentiating between which top tech stocks are worth buying is easier said than done. Let’s dive into two of the largest and most prominent names in the Canadian market, and consider which may be the better buy.
Constellation Software
Constellation Software (TSX:CSU) provides enterprise and software solutions to clients spread across diverse sectors. Its specialized and crucial solutions enable clients to improve productivity, sales, cost-effectiveness, customer satisfaction and service. Constellation Software’s client base encompasses various important sectors such as biosciences, communications, financial services, education, utilities, marine, retail, and others. Operating globally, this is a company that’s seen impressive growth over the long-term, surging nearly four-fold over the past five years.
Much of this has to do with the company’s recent financial performance and its ability to produce consistently higher returns on invested capital over time. The tech giant brought in US$2.4 billion in revenue during the first quarter of 2024, with net cash flows coming in at US$737 million. That’s a very considerable free cash flow yield, and it is what leads many growth investors to consider this company a top pick right now.
Indeed, Constellation Software has been among the best Canadian stocks to own since its IPO in 2006. Over just 18 years, this is a stock that’s soared more than 22-fold, meaning patient investors have been well rewarded for simply sticking with it, and buying dips over the long-term.
The company’s growth plans are impressive, as it continues to acquire smaller firms and consolidate the fragmented tech industry. For those looking to ride broader long-term secular growth trends in the software space, this is a top way to do so.
Shopify
As one of the largest e-commerce giants in the world, Shopify (TSX:SHOP) offers a platform to small and medium-scale businesses to sell their products and services. The company generates revenue by charging transaction fees above a certain threshold, benefiting from the broader e-commerce growth trends we’ve seen in the market. Additionally, the company also generates strong profits and cash flows from its services business, which is growing at an impressive clip.
Like Constellation Software, Shopify has seen strong growth since its IPO, and it is a top-performing TSX stock. However, with incredibly high expectations built up following the pandemic (when companies were forced to set up online shops), Shopify’s sky-high growth rate at the time was put to the test. And notably, growth has slowed.
That said, after recent comps came down (and probably more accurately reflected the rate at which Shopify will continue to grow long term), the company’s recent results speak to strong growth across its core business. The company’s gross merchandise value (GMV) increased 22% year-over-year this past quarter to US$67.2 billion. In terms of free cash flow, Shopify brought in US$333 million and continues to show profitability.
For long-term investors, I think Shopify is probably the riskier play, considering its growth has been more volatile over time. But for those betting on long-term growth in the e-commerce world, it’s true that Shopify stock remains unmatched right now.
Bottom Line
Both Constellation Software and Shopify represent high-growth businesses with the potential to outperform over the long term. That said, I think Constellation Software’s long-term track record, as well as its consistency and stability shown during previous downturns, could become much more valuable to investors who are worried about a potential recession.
Shopify may have more near-term upside, but Constellation would be my longer-term bet right now.
