Tech companies are hot commodities these days. In the entire world, tech is essentially the only sector that is moving to a great degree.
Many of the world’s biggest tech companies just reported their earnings, and the results were very telling. They are pretty much the only companies in the world that are benefitting from the global lockdown. Many reported huge earnings and revenue surprises when other companies were getting smoked.
Should I buy tech today?
It is hard to argue that these stocks haven’t done well. However, these stocks are trading at extremely high valuations relative to their earnings and revenues. The growth rates needed to justify the current price levels are astronomical. All the money in the world is already there, so the fact is that these stocks are more at risk of a downward shock than an upward surprise at this point.
Nevertheless, many of these tech companies boast fantastic growth rates and have excellent underlying fundamentals. Frequently, they are asset-light with strong balance sheets that make them more resilient than other companies, traditional companies.
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A popular tech company
One Canadian tech company that performed very well over the past several years is Constellation Software (TSX:CSU). This growth giant is a stunning performer that has made a lot of people money over the past several years. The growth-by-acquisition company proved that it can make its mark in the software realm.
The company provides software and services solutions to a number of public and private industries. It currently operates in 100 markets located around the world. The company operates in a wide variety of industries including but not limited to biosciences, utilities, education, and hospitality.
In Q1 2020, Constellation Software announced solid results. The company’s revenue increased by 16% for the quarter year over year, although its organic growth shrunk by 2%. The decreased organic growth was disappointing, but not a game changer. Cash flows from operations were positive, increasing by 27%. Free cash flow, the most important metric, in my mind, increased by 24% over the same period.
Free cash flow is what powers growth, share buybacks, and dividends. Constellation Software is a bit of an anomaly among the high flyers, since it possesses a dividend. The dividend is not large at the current share price at 0.34%, but it still returns some capital to investors.
The bottom line
Tech stocks like Constellation Software are growing companies with strong balance sheets. They are frequently globally diversified and offer a wide range of solutions to online marketplaces.
Unfortunately, everyone in the world knows that these companies are pretty much the only game in town at the moment when it comes to growth. These stocks are very expensive with an enormous chance for downside risk if growth slows or investor sentiment changes.
Can you buy shares of Constellation Software at the current share price? You certainly can if you have a long-term view and don’t mind adding on a dip. Constellation Software is very expensive, so be prepared to ride out some volatility if you decide to take the plunge.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kris Knutson has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Software.