Kalkine Media - When Canadians think of growth stocks, especially in the tech sector, companies like Shopify (TSX:SHOP) or Lightspeed Commerce (TSX:LSPD) often come to mind due to their impressive performance in recent years. However, there's another TSX tech stock that deserves more attention from investors:
Constellation Software (TSX:TSX:CSU)
Constellation Software (TSX:CSU) has been a standout performer in the Canadian tech space since its IPO in May 2006, delivering remarkable returns to investors. Over the years, it has provided returns exceeding 19,680%, or over 24,480% when factoring in dividends. Despite being a tech stock, Constellation Software also pays dividends to its shareholders on a quarterly basis, albeit with a modest yield of 0.15%.
So, what exactly does Constellation Software do?
Headquartered in Toronto, Constellation Software is a diversified software company with a market capitalization of $77.58 billion. The company specializes in acquiring, managing, and developing various vertical market software businesses. These businesses offer software solutions to customers in niche markets within both private and public sectors. Constellation Software focuses on acquiring high-growth potential and high-profit-margin companies rather than startups or emerging businesses.
Its strategic approach to acquisitions has been a key driver of shareholder value growth and cash flow generation. Constellation Software generates revenue through license, maintenance, and professional fees, as well as hardware sales.
How has Constellation Software been performing?
In the third quarter of 2023, Constellation Software reported a 23% year-over-year growth in revenue. Despite challenging macroeconomic conditions, its sales have grown by 27% over the last three quarters, fueled by both acquisitions and organic growth. The company ended the quarter with $1.03 billion in liquidity, up from $811 million at the end of 2022. While its debt balance increased to $3 billion from $1.97 billion during this period, the funds were used for strategic acquisitions to further diversify and strengthen its revenue streams.
Looking ahead, analysts anticipate Constellation Software to achieve over 40% annual growth in adjusted earnings between 2024 and 2027. Despite its seemingly high valuation of 35.09 times forward earnings, considering the expected earnings growth, Constellation Software remains reasonably priced. While it may not replicate the extraordinary returns of the past two decades, it is still considered an excellent tech stock for long-term capital gains.
In summary, Constellation Software's track record of growth, strategic acquisitions, and strong financial performance position it as a compelling investment opportunity in the Canadian tech sector.