Canadian technology stocks have generally soared so far in 2023. The S&P/TSX Capped Information Technology Index has surged by 42.6% year to date. Actually, investors may have pocketed up to 330% in gains on two of the tech index’s 22 constituents this year. Although there isn’t much value left on the table for new investors to grab on some select names, Canadian investors may still find pockets of value in some individual stocks yet to reach full potential.
Which Canadian tech stocks have rallied high?
Among the 22 Information Technology Index constituents, 14 have risen by at least a double-digit percentage, and 17 tech stocks (or 77% of the index constituents) have gained in value so far this year.
The stellar performance was led by sector heavyweight Shopify (TSX:SHOP) stock, which has gained about 90% so far this year, and constitutes 26.4% of the index portfolio’s weight. Shopify stock’s rally earned it a third place performance behind cryptocurrency mining stocks Hut 8 Mining and Bitfarms, which have surged so far in 2023 by 329% and 317%, respectively.
Hut 8 Mining and Bitfarms stock comprise 0.67% and 0.29% of the index weights. Their triple-digit performance didn’t move the index’s needle much.
That said, not every tech name has soared. Five companies on the index, including Enghouse Systems, Converge Technology Solutions, and Softchoice Corp. have, respectively, lost 12.7%, 25.7%, and 8.15% in value since the dawn of 2023.
ChatGPT’s role in the tech stocks surge
Tech stocks have rallied with growing hype around generative artificial intelligence, which kicked off with the launch of OpenAI’s ChatGPT in late 2022.
AI is a key value driver for technology stocks right now. Every tech stock with any semblance of a functional AI technology to its story has surged. Whoever claims to have some cool AI platform is getting some love, despite a record of historically poor performance. Without mentioning names, I could be looking at BlackBerry Ltd. (up 41.2% year to date).
Is it too late to buy Canadian tech stocks?
If AI is the overweighed asset in any tech investment thesis today, then it’s possible that valuations may go bust if generative AI loses its luster, and is eventually commoditized. It may seem too late to buy into tech stocks that have soared to frothy valuations. I’m looking at Nvidia (NASDAQ:NVDA), a US$1.1 trillion semiconductor stock that has soared nearly 220% year to date to reach a PE multiple of 240! There might be too little upside left on Nvidia now. A bubble has formed around generative AI, and Nvidia has to grow into its new valuation, or else…
Most noteworthy, Meta Platforms, the owner of Facebook, WhatsApp, and Instagram, promises to disrupt the youthful “industry” as it announced plans to make its large language model, Llama 2, open-source software this week for developers to tinker with. Llama 2 is somewhat similar to OpenAI’s GPT-4, the brains behind ChatGPT. Meta’s move may significantly dilute rivals’ competitive moats, and potentially lower their valuations.
Interestingly, though, if generative AI is commoditized, then Nvidia, and other direct and indirect suppliers to the new technology ecosystem could reap massive business gains as their total addressable market increases.
Regardless of what happens with generative AI, some of this year’s high-flying stocks, like Shopify, could still have some legs to sustain a marathon.
Can Shopify stock go higher?
Shopify stock is merely in recovery mode. Trading around $90 per share, SHOP stock trades far below its (split-adjusted) all-time highs above $215. The ecommerce platforms vendor has refocused its operations away from overly ambitious, high-cost order fulfilment investments that gobbled money. If the Canadian economy evades a potential near-term recession, Shopify has a fair chance of breaking into sustainable profitability over the next 12 months.
Bay Street analysts project 20% year-over-year revenue growth for Shopify in 2023 to US$6.7 billion before a further 18% surge to a record US$7.9 billion sales by 2024. If achieved, revenue growth could lift Shopify’s normalized earnings, before taxes, to more than US$816 million — well above pandemic-era comparable earnings of US$730 million in 2021.
Shopify could soon be more profitable than it was during the stay-at-home ecommerce-shopping era.
Foolish bottom line
It should pay to remain choosy and buy Canadian tech stocks with more legs to run in a long-term growth-oriented stock portfolio.
