In the Canadian tech sector, there are really only a handful of companies most investors look at, and there’s some rationale for this view. Most notably, the pool of companies with 10-digit valuations is limited to a select few. Among the companies that find themselves in this grouping, Shopify (TSX:SHOP) and Constellation Software (TSX:CSU) are among the leaders that have found a way to carve out remarkable niches in the global tech space. These are companies that many long-term investors looking at growth stocks may consider for their portfolios.
Of course, the question is which company may be the best bet in this current environment. Let’s compare and contrast these two giant Canadian tech companies right now.
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Shopify
An absolute e-commerce powerhouse, Shopify has grown from a little-known early-stage company to one of the few dominant players in the world of online storefront solutions. Shopify’s vertically integrated e-commerce platform allows businesses of all sizes to set up online shops and handle everything from payments to distribution.
After the pandemic, Shopify saw absolutely out-of-this-world revenue and earnings growth. While the company’s growth rates have come down considerably (as expected) from these incredible levels, this is still a noteworthy growth stock, posting revenue growth of around 25% each and every quarter.
Of course, the question is whether this growth rate can continue over the long term. Many investors bullish on this name continue to note the company’s strength in innovation and its focus on implementing artificial intelligence (AI)-powered tools to help sellers do what they do best and sell more goods. As the company’s gross merchandise volume (GMV) grows, so should its fees, leading to strong network effects that AI can truly power over the long term.
For those with a long-term investing time horizon, I still think Shopify looks attractive at a price-to-earnings-to-growth ratio of around 1.1. For a company of this quality, that’s the sort of growth at a reasonable price I think investors can get behind.
Constellation Software
Another powerhouse in the tech sector, Constellation Software (TSX:CSU) is a leader in providing vertical market software solutions to a massive clientele. The company has grown over time using a growth-by-acquisition model. What that means is that Constellation Software has become effectively a software conglomerate buying up early- to mid-stage software companies and rolling them into its portfolio.
In doing so, Constellation Software has been able to grow much quicker than many of its peers. This business model is decentralized and scalable and isn’t dependent on platform-based revenues and an ecosystem to continue to grow.
Notably, Constellation has been able to produce some incredible returns on invested capital with respect to its previous acquisitions. So, as long as the market for early-stage software companies remains as fragmented as it is, there’s a long growth runway ahead that investors are looking forward to capitalizing on. Constellation’s underlying fundamentals remain strong, and there’s good reason why this company is a core portfolio holding for so many investors.
Bottom line
My view is that these two companies are both great options for long-term investors to consider. For those with a more speculative lens, Shopify may be the better option from a PEG ratio and an underlying growth perspective. However, for those seeking greater stability in this uncertain market, I’d opt for Constellation Software. It really depends on each individual investor and their medium- to long-term outlook from here.
