Investing in tech stocks is a compelling strategy for those looking to maximize their portfolio’s growth potential. As tech stocks are associated with innovation, they have the potential to deliver above-average growth.
It’s worth noting that companies with exposure to areas like digital transformation and artificial intelligence (AI) are promising and offer the potential for substantial returns. These businesses can scale quickly and penetrate new markets, leading to exponential growth in their value. This creates an opportunity for investors to achieve stellar returns by capitalizing on ongoing technological advancements.
With this background, let’s explore two high-quality Canadian tech stocks with fundamentally strong businesses. Investors can buy and hold these tech stocks for the next decade to generate stellar returns and beat broader markets by a wide margin.
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Constellation Software
Investors planning to invest in a few high-quality Canadian tech stocks could add Constellation Software (TSX: CSU) to their portfolio. As a leading provider of specialized software and services, Constellation Software owns a robust network of companies catering to diverse industries and has built a broad, sticky customer base.
The company’s impressive growth is evident in its financial performance. For the first half of 2024, Constellation Software reported a 22% year-over-year increase in total revenues, primarily driven by its strategic acquisitions. During the same period, the company’s cash flow from operations surged 33% compared to the previous year. This strong performance has propelled Constellation Software stock, which has appreciated by approximately 51% over the past year.
Further, Constellation Software stock has increased at a compound annual growth rate (CAGR) of over 28% in the last five years, translating to an overall gain of about 256%.
Constellation Software’s diverse portfolio and expanding customer base provide a solid foundation for future growth. Moreover, the momentum in its business will likely sustain given the company’s emphasis on tailored software solutions and its strategic acquisition strategy, which position it well to capitalize on emerging trends such as digital transformation and AI. Overall, Constellation Software’s ability to grow its revenue rapidly and acquire vertical market software companies with solid growth and earnings position it well to deliver above-average returns in the long term.
Shopify
Investors seeking opportunities in the tech sector with long-term growth potential could consider adding Shopify (TSX: SHOP) stock to their portfolios. This Canadian technology company is well-positioned to benefit from the ongoing shift towards omnichannel platforms through its unified commerce solutions.
Given macro uncertainty, Shopify stock is down about 8% year-to-date and underperformed the broader markets. However, its ability to expand Gross Merchandise Volume (GMV) and Gross Payments Volume (GPV) enabled Shopify to deliver solid revenue in the second quarter of 2024. Its revenue increased 21% year-over-year, and free cash flow margin more than doubled.
Thanks to the durability of its revenue and pullback in share price, Shopify is an attractive investment near the current levels.
The company’s fundamentals remain strong, evident from its consistent growth in key metrics such as GMV, GPV, and free cash flows. Further, Shopify continues growing its active merchant base. Its dominant position in the e-commerce sector, innovative product offerings—like payment processing and sales and marketing tools—geographic expansion, and integration of AI into its offerings augur well for growth.
Further, cross-selling opportunities, a transition towards an asset-light business model, and cost-reduction initiatives position it well to deliver sustainable earnings in the long term and solid capital gains.
