Canadian Software Stocks Are Booming—But Are They Really Worth It?

Valuation gaps emerge as top tech firms ride high on growth sentiment, leaving analysts and algorithms struggling to keep up

Application software firms in Canada are getting a lot of love from the market lately. But with soaring stock prices and big-name momentum behind them, there’s a nagging question investors can’t shake—are they actually overvalued?

A fresh analysis of the country’s top software names reveals a growing disconnect between market enthusiasm and fundamental valuations. From giants like Shopify to niche players with dedicated enterprise offerings, the numbers are telling a more complex story beneath the bullish headlines.

Valuation Methods Put to the Test

Investors aren’t short on ways to put a number on a company’s worth. For this analysis, StockCalc crunched the data on 10 of the biggest Canadian application software firms listed on the TSX and Venture exchanges. Their models used several classic valuation tools, each offering a slightly different lens:

In case you’re wondering what’s under the hood, here’s the main toolkit StockCalc used:

• Discounted Cash Flow (DCF): Projecting a company’s future cash and then rolling it back to today.

• Price Comparables (Comps): Stacking the company up against peers in the same sector.

• Adjusted Book Value (ABV): Book value times its average price-to-book over 10 years.

• Analyst Consensus: What the experts think the stock should be trading at.

Each of these methods gives its own angle, and the disparities between them can reveal some surprising insights.

Growth Optimism vs. Reality Check

If you go by analyst price targets, the future looks bright. Across the board, those estimates tended to land higher than StockCalc’s models. Why? It’s all about growth.

Many of these companies don’t pay dividends—only three of the top ten do—so their value hinges heavily on projected future performance. That’s where things get tricky.

In cases like Shopify, the current share price implies explosive growth—so much so that even bullish models like DCF couldn’t quite justify it unless extremely high assumptions were baked in.

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That’s not a red flag per se, but it should make investors pause and consider whether growth expectations have gotten a little too frothy.

Who’s Looking Expensive? Who’s Not?

Let’s break it down. While we don’t have exact valuation deltas from StockCalc’s tool in the report, it’s clear from the summary that some companies are priced well above their fundamental models.

Here’s a quick snapshot of how companies are stacking up:

Some names like Topicus.com stand out as undervalued, possibly flying under the radar as investor hype gets directed toward flashier names like Lightspeed and Shopify.

Why Analyst Targets Are Higher Than Models

It’s no secret that analysts often wear rose-colored glasses when projecting for tech companies. In this case, their targets are based on long-term scalability and aggressive revenue growth—especially in a sector that has momentum.

But the models from StockCalc show more caution.

They’re essentially saying: unless these companies pull off superhuman growth, the current prices aren’t justified. And that matters, especially for retail investors betting on continued upside without factoring in execution risk.

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That kind of optimism can backfire fast when market sentiment shifts.

What Investors Should Be Watching Now

This whole analysis serves as a reminder—not all price surges are rooted in reality. That doesn’t mean investors should ditch high-growth tech stocks, but they should definitely do their homework.

Here’s what matters most right now:

• Whether companies are meeting or beating earnings expectations consistently.

• How efficient they are in deploying capital (especially those not paying dividends).

• Industry-specific growth cycles, especially in niche software verticals.

• The risk of interest rate changes putting pressure on high-multiple valuations.

A lot of Canadian software companies are still in the build-and-scale phase, where profits are deferred for reinvestment. That can work well—until it doesn’t.

Final Thought: A Reality Check in the Hype Cycle

You can’t blame investors for being excited. Canada’s tech scene has matured significantly in the last decade, producing some serious contenders on the global stage. But excitement without scrutiny leads to bubbles.

Some of these stocks will likely justify their lofty valuations. Others? Maybe not.

There’s a fine line between forward-looking optimism and betting the house on assumptions that might never pan out.