Constellation Software Earnings: Portfolio Expansion and Ongoing Skew to Recurring Revenue

We maintain our CAD 2,110 fair value estimate for narrow-moat Constellation Software following the release of second-quarter 2024 results. As a serial acquirer, the firm’s performance was primarily driven by inorganic growth from incremental vertical market software acquisitions. We continue to believe that Constellation enjoys high customer switching costs inherent in software and operates a remarkable acquisition engine. However, at current prices, the firm’s shares screen as highly overvalued on a risk-adjusted basis, trading at an eyewatering 93% premium to our valuation with a forward fiscal 2024 price/GAAP earnings ratio of 97 times.