There was a time when there were just a few investable technology companies on the TSX.
Fast forward to today and investors have their choice of more than 20 technology companies with viable, well-capitalized business models.
Jason Donville, president & CEO of Donville Kent Asset Management, and Jesse Gamble, Senior VP & Portfolio Manager, have had a front row seat to this exciting transformation, which has its roots going back about 20 years.
They take you through that journey and offer up four of their highest conviction tech stock ideas, and why they have lots of runway for growth.
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by Jason Donville and Jess Gamble, Donville Kent Asset Management
The past eighteen months have witnessed a surge in the number of home-grown technology companies with viable business models on the TSX.
In the past year and a half, technology stocks have jumped from perching on the periphery of the TSX to mainstream.
Before 2010, there were five major tech companies on the TSX, specifically:
(i) Open Text
(ii) Constellation Software
(iii) Enghouse Systems
(iv) CGI
(v) RIM (Blackberry)
At that time, CGI was the largest of the group. RIM was already losing market share to Apple and the other three were still too small to have much analyst coverage.
Nothing really changed until 2014/2015 when Kinaxis and Shopify went public.
Still, even with these additions, the Canadian tech sector was relatively small, comprising less than 5% of the TSX’s marketcapitalization.
Things really started to change in 2019/2020 for two major reasons.
- First, the IPOs of Lightspeed, Docebo, Dye & Durham, Nuvei, Pivotree, BBTV, AdCore, WeCommerce, and Wishpond gave the TSX a critical mass of mid cap tech stocks that were focused on the digital economy, growing quickly and well capitalized.
- Second, smaller companies that had been listed for a while but had not quite solidified their action plans began to mobilize.
This list includes companies like Prontoforms, Sangoma, MediaValet, and Vitalhub.
Over the course of eighteen months, the number of high-quality tech stocks jumped from just six or seven to more than twenty.
Earlier this month, we listened to an interview with famed tech investor Marc Andreessen. His main takeaway was that the Dotcom bust of the 2000’s destroyed any public market appetite for high growth tech stocks.
However, the technology sector continued to innovate and grow and as a result, there is a 20-year backlog of tech companies that are now starting to go public.
Today, the market is receptive to high growth stocks. A major caveat here is the quality of these tech companies.
They provide real services, frequently mission-critical services, and generate attractive economics for shareholders.
Last year, our July 2020 newsletter discussed how tech infrastructure and costs have reached a point where technology that previously was not economically feasible is now achievable.
As a result, we have seen a substantial increase in deal flow, and it seems like we are evaluating at least one or two IPOs each week.
We participated in several IPOs in 2020 and we are seeing a healthy pipeline for 2021.
Following the excellent performance of tech stocks in 2020, we believe this trend will continue into 2021 for three reasons.
(i) We estimate that the leading tech companies on the TSX will grow at more than 30% annually, compared to the rest of the companies on the TSX, which are growing at perhaps 7%.
(ii) The digital transformation that began many years ago and accelerated sharply in 2020 due to the pandemic will only evolve faster and faster in 2021.
(iii) With more than 150 micro cap tech stocks on the TSX, we expect at least five transformations to occur in 2021 as well as another five significant IPOs.
Looking beyond just 2021, there are some prognosticators who believe that the TSX, like most stock markets, will be dominated by tech companies a decade from now and we could not agree more.
Some have suggested that this sector could account for 50% of the TSX’s market capitalization in ten years’ time.
If such a prediction is even remotely accurate, it implies that the Canadian tech sector will easily be the largest driver of Canadian wealth for the next decade.
To help you take advantage of this shift, here are some of our best tech investment ideas below.
Tech ideas
Our methodology ranks stocks on a growth to value scale and the stocks below have the most attractive metrics for 2021.
Wishpond Technologies (WISH) provides digital marketing solutions and cloud-based software that assist small-to-medium enterprises (SMEs) with a range of marketing initiatives, including lead generation, sales conversion, and analytics.
WISH went public in December 2020 at $0.75/share and now trades at $2.10/share. The Fund represented a large portion of the IPO proceeds and has continued to add more to its position ever since.
The company has announced two acquisitions since going public and we expect a larger one at the beginning of 2021.
At this time WISH’s market cap is perched at $100 million, a noteworthy threshold as surpassing this mark will certainly attract more investors.
Dye & Durham (TSX:DND) went public in July 2020. The Fund participated in the IPO at $7.50/share and bought a lot more once the stock started free trading.
We continue to have the highest conviction in DND. It would be hard to find another company achieving this much growth while demonstrating tremendously high EBITDA margins.
The company recently announced that it will acquire a majority stake in Courthouse Solutions as well as acquire DoProcess, adding to its flurry of M&A activity last year.
Sangoma Technologies (TSXV:STC) continues to effectively illustrate its value proposition to clients as a one-stop shop for communication software and services, specifically targeting middle market companies.
STC intends to list on an exchange in the US and shift to reporting in USD, which would expand the universe of potential investors, thus driving STC’s multiple higher.
The company is also expected to make one or two sizeable acquisitions with its substantial cash reserves.
We expect its business to double in size in just over three years, which will draw larger investors as well as potential acquirers.
The business proposition is occasionally still misunderstood due to STC’s previous reputation as a pure hardware business.
However, if the company continues to execute successfully, this stock should see a significant re-rating.
VitalHub (VHI) announced notable customer wins since the quarter ended and we expect VHI to continue reporting strong earnings.
This pandemic has highlighted how critical it is for hospitals to be efficient with their resources, giving VitalHub the opportunity to make a real difference with hospitals and their operations.
Cash reserves are equivalent to 25% of the company’s marketcap and we expect VHI to use this cash to double the size of its business, similar to what they did in 2020.
Organic growth will surprise to the upside.
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