Is Shopify Stock Canada’s Best Tech Star?

I don’t think there’s any doubt that Shopify (NYSE:SHOP) is one of Canada’s best tech stocks. Up 163% in 2019, SHOP stock is having a bang-up year in the markets. 

SHOP Stock Earnings on Thursday Could Give it the Momentum to Get to $400

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However,  considering that Shopify stock is trading at 375 times its forward earnings and 31.5 times its sales, I don’t think there’s any doubt that its valuation is approaching nosebleed territory. 

Another InvestorPlace columnist, Josh Enomoto, recently suggested that the owners of SHOP stock might want to trim their stakes. 

“The finer print from the last earnings report isn’t as impressive as many analysts have claimed. For instance, folks are going crazy over the fact that year-over-year sales growth is nearly 48%. But in Q2 2018, the YOY growth rate was a much more robust 61.5%,” Josh wrote in a column published on Aug. 7.   

At the end of the day, he believes that SHOP’s gains over the past two years, both in terms of its stock price and its revenue growth, have been the easy part. The hard part is continuing to grow at a double-digit-percentage pace when Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are watching intently, figuring out how they can jump-start their growth by emulating what Shopify’s done.

Josh still believes that SHOP stock is worth owning. But he and I think that the valuation of SHOP stock is a little rich, making Shopify stock likely to correct in the coming months. 

In the meantime, Shopify’s not the only Canadian tech star worth considering. Here are  three other Canadian tech names investors ought to consider putting on their watchlist of potential stock buys. 

Ceridian HCM

Although the headquarters of the  human capital management software company is technically in Minneapolis, Ceridian HCM (NYSE:CDAY) CEO David Ossip runs the company out of Toronto. 

In May 2018, I recommended that investors buy Ceridian stock. I contended that its Dayforce cloud-based software that allows companies to combine HR, payroll, benefits, workforce management and talent management in a single application,was a formula for success. 

Back then, Ceridian had a little more than 3,000 customers who paid a per-employee, per month (PEPM) subscription over a term of between three and five years. If a customer’s headcount grows, Dayforce generates additional revenue. 

So successful has Dayforce been — its compound annual growth rate over the past five years is 60% — that I called it one of the best up-and-coming stocks on the NYSE. Since my column was published, CDAY stock is up 65%, and more gains are on the way. 

In Ceridian’s Q2 2019 report, the company said that Dayforce’s recurring revenue had jumped  31.3% year-over-year  in Q2 to $102.4 million. More importantly, Dayforce’s customer base jumped,33% YoY, exceeding 4,000. 

Business is booming. 

Constellation Software

Constellation Software (OTCMKTS:CNSWF) is a mercurial, publicity-shy software company run by billionaire Mark Leonard.

The company builds its business through acquisitions. In fiscal 2018, it made $630.7 million of acquisitions, and none was considered to be significant on its own.  That means CBSWF does a lot of due diligence and legal work on smaller deals that most larger software companies wouldn’t bother with. 

In fiscal 2018, its top line rose 23% YoY to $3.1 billion and its bottom line jumped 71% YoY to $379.3 million. Most of its sales growth came from acquisitions, as its revenues excluding acquisitions increased 2% YoY. 

Constellation’s share price rises because it makes acquisitions at a fair price and adds value to the companies it acquires by growing their revenues over time. 

Constellation is considered one of the most disciplined allocators of capital in North America. 

Lightspeed POS

Lightspeed POS (OTCMKTS:LGHEF) is a Montreal-based provider of payment processing systems for small and medium-sized businesses. Founded in 2005, Lightspeed went public in March of this year. 

Lightspeed’s IPO was one of the top ten tech IPOs in the history of the Toronto Stock Exchange.  Its share are also now listed on the American pink sheets. 

“A couple of years ago, people would have said, you’re not going to get American-level valuations, or interest, or volume on the Toronto Stock Exchange, and hopefully we’ll show that that’s just not true,” Lightspeed CEO and founder Dax Dasilva said at the time of its IPO. “We’ve been able to attract as many American investors as Canadian investors by going public, and also by going public in Canada.”

The company expects fiscal 2020 revenue of at least $112 million with a positive cash flow of $9.5-$11 million. It has almost $200 million in cash and no debt at the moment. 

The company’s cloud-based point-of-sale solutions are currently used in over 100 countries and 49,000 locations around the world. Its target market of retailers and restaurants is approximately 47 million. 

It’s an up-and-comer.

 The Bottom Line on SHOP Stock

Is SHOP stock Canada’s best tech name?

While there’s no doubt it is Canada’s biggest tech stock by market cap, it’s probably the most expensive in terms of its valuation.

Would I own SHOP stock? You bet.

However, I wouldn’t discount these other three Canadian tech stars.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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