Markets are giving Constellation Software the short shrift, the company is rock solid and should give excellent returns from its cash cows.
Constellation is listed under two stock symbols US and Canadian
The difference is because of the US and Canadian Dollar. Current Exchange Rate: $1 Canadian = $0.73 US
CSU.CA - $2,781 - CAD Toronto Stock Exchange
CNSWF - $2,035 - USD OTC
The analysis is from a US analyst so we’re using CNSWF numbers below.
The stock took a beating, down almost 50% from its 52 week high of $3,099
Why? - Multiples were high to start with and because of the overall decline in multiples for SaaS companies, Constellation took a hit as well.
Fundamentals are still intact: Forecasted revenue growth of 12-15% and earnings growth 18-20% suggest that this model is not going to be disrupted by AI in a hurry.
Switching costs are a big competitive advantage: It is a vertical market software provider, specializing in government, utilities, courts where it is mostly entrenched as the incumbent.
It has market leadership and penetration in Canadian municipalities, utilities, police and fire departments, and it actively pursues smaller markets to maintain that market leadership and moat. Once a small town of 20,000 people installs a Harris billing system, they almost never switch. The cost and headache of migrating data are too high. This gives CSI nearly 100% "market share" of the existing customer's wallet for decades.
Vertical market leadership through acquisitions - Its business model of acquiring smaller companies works well when you’re custom built for that vertical giving you a lifetime advantage from larger one size fits all software.
The price is much better:
P/E 17, growing at 18-20%, P/S ratio of 3, growing at 12-15%
Cash flow margins - 25%
Operating margins - 20%
SaaS - Software As a Service companies have taken a nosedive with multiples cut in half, because of the fear of disruption from AI. Given how fast the likes of Anthropic, ChatGPT, and Gemini have grown - this could disrupt these industries further or at least erode their margins. McKinsey expects the disruption to be widespread.
But my take is why wouldn’t the likes of Constellation do the same thing?
There are competitors such as Tyler in Canada and Workday / Oracle / SAP, who have a stronger foothold in larger Federal contracts.
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I believe that it will survive AI disruptions, domain expertise and incumbency are not easy to dislodge - and over time it should be able to use the same tools for its own operations. Their focus on smaller local governments that never changes its back office operations is very strong.
This is a good GARP (Growth At A Reasonable Price), that can be bought for the long-term.
Nebius' masterly execution as an integrated neocloud player allows it to borrow at very cheap interest rates with very little shareholder dilution.
Nebius is executing brilliantly as an integrated neocloud player with tremendous reach, value addition and strong pricing power.
