Company Reports

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.

Constellation Software’s business model is akin to that of an investment company, with a specialization in asset-light, cash-generative vertical market software operators. The software niche presents attractive economics, including negative working capital as cash is often received in advance of services being rendered. The firm’s playbook is to identify, acquire, manage, and grow operators via a highly decentralized model with a small corporate office, and six operating groups. As Constellation has scaled over time, capital allocation decisions have become increasingly decentralized, with the exception that rare large deals require head office approval. Acquired businesses are run independently, held indefinitely, and Constellation compounds cash flow by redeploying excess cash to acquire additional businesses with incrementally higher rates of return.

We launch coverage of Constellation Software with a CAD 2,110 fair value estimate and narrow moat rating. The firm's business is akin to that of an investment company, with a specialization in asset-light, cash-generative vertical market software operators. Together, Constellation operates over 1,000 distinct software businesses in over 150 vertical markets globally, with no one business contributing materially to group earnings. We believe the firm enjoys high customer switching costs inherent in software and operates a remarkable M&A engine supported by brand assets and a vast proprietary database. However, at current prices, Constellation shares screen as highly overvalued on a risk-adjusted basis, trading at an eyewatering 76% premium to our valuation with a forward fiscal 2024 price to GAAP earnings ratio of 97 times.