TFSA Investors: What to Buy for a Legit Shot at $1 Million by 2035

Here’s how TFSA investors in Canada can build a $1 million equity portfolio by purchasing quality growth stocks such as Shopify.

Investing in quality growth stocks is a popular strategy on Bay Street, as it allows you to generate exponential gains. Moreover, the massive drawdown in the valuations of growth stocks now allows shareholders to go bottom fishing and buy the dip.

Canadians can consider building a portfolio of growth stocks and holding them in a TFSA, or Tax-Free Savings Account. Any returns generated in the TFSA in the form of capital gains are exempt from the Canada Revenue Agency.

The maximum cumulative contribution room in the TFSA has grown to $88,000 in 2023. So, let’s see how you can use this contribution room to own growth stocks and build your TFSA portfolio to $1 million by 2035.

Shopify stock

One of the fastest-growing stocks on the TSX, Shopify (TSX: SHOP) was also the largest Canadian stock in terms of market cap back in November 2021. However, a challenging macro-environment meant Shopify’s top-line growth decelerated rapidly in 2022, driving share prices lower by 80% from all-time highs.

Shopify recently increased prices for its monthly and annual subscription plans, which should improve profit margins. However, it might also lead to lower engagement rates from existing customers.

In order to take advantage of the growing e-commerce market, Shopify is building out a network of fulfillment centres to optimize the supply chain of its merchant base. Even if Shopify stock regains its all-time high, it will gain over 250% from current levels.

Snowflake stock

A company that’s part of Berkshire Hathaway’s equity portfolio, Snowflake (NYSE: SNOW) is an enterprise-facing SaaS (Software-as-a-Service) company. In the fourth quarter (Q4) of fiscal 2023 (ended in January), Snowflake increased sales by 53% year over year to US$589 million, which was US$14 million higher than estimates. Its adjusted net income rose 35% year over year to US$0.14 per share.

In fiscal 2023, Snowflake increased sales by 69% to US$2.07 billion, which is quite exceptional given the current environment. In fiscal 2022, its revenue was up 106% year over year.

Snowflake expects to grow sales by 40%, while analysts expect profit margins to more than double to US$0.61 per share in the next 12 months.

Constellation Software stock

Among the most popular tech stocks on the TSX, Constellation Software (TSX: CSU) has returned over 2,000% to investors in dividend-adjusted gains since March 2013. Constellation Software has increased its sales on the back of highly accretive acquisitions. It acquires companies that report consistent profits and offer mission-critical services to enterprises, which ensures high switching costs and robust customer retention rates.

Analysts tracking Constellation Software stock expect its sales to touch $10.44 billion in 2023, up from $6.8 billion in 2021. Its adjusted net income is forecast to rise from $59.06 per share to $78.5 per share in this period. So, CSU stock is priced at four times forward sales and 29 times forward earnings, which is reasonable given growth forecasts.

It’s also trading at a discount of more than 10%, given price target estimates.

Datadog stock

The final growth stock on my list is Datadog (NASDAQ: DDOG), a cloud-based software company that provides enterprises with solutions to track and observe devices, servers, networks, and applications.

In the last 12 months, Datadog has reported sales of US$1.67 billion, compared to US$363 million in 2019. This stellar revenue growth has allowed the company to report a free cash flow margin of 21%.

Datadog ended 2022 with 23,200 customers and a net-dollar revenue retention rate of 130%. It shows existing customers increased spending on the Datadog platform by 30% in the last four quarters.

With a total addressable market of US$62 billion, Datadog has enough room to grow its sales in the upcoming decade, making DDOG stock a top bet right now.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Berkshire Hathaway, Constellation Software, Datadog, and Snowflake. The Motley Fool has a disclosure policy.

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