It was a great summer for Constellation Software (TSX:CSU). The tech stock soared between June and September, up 26% during that time. In the last month alone, shares are up about 10%! So what’s going on with this stock, and should Motley Fool investors still consider it a buy? Or leave it alone for now?
What happened
While other tech stocks have jumped and dived, Constellation remained relatively stable during the pandemic. And that alone could almost account for its stable and rising share price. However, there’s definitely more to it than that. The acquisition kingmaker has been continuing its strong acquisition strategy, most recently buying up a new one just this week in Infinity Enterprise Lending Systems. This is on top of several acquisitions made during the summer months.
On top of recent acquisition strategies, its past acquisitions and choices during the pandemic have paid off. During the latest earnings report, Constellation announced revenue grew 35% year over year during the second quarter. Of that, 14% was due to organic growth, so more than half were from acquisitions. Net income rose 7% year over year, with cash flow reaching $171 million, down 28% compared to 2020. During this quarter, the company completed a total of $328 million in acquisitions.
So what
Now usually, I wouldn’t look at an earnings report and state, “Hey this stock is a buy!” But here, what we’re seeing is a continued trend for Constellation stock. The company is strong today because it’s stayed the course. It’s been an acquisition power house and seems to have a strong management team able to identify the future of Software as a Service.
This recent quarter was proof of that, with growth across the board. Again, while other tech stocks continue to either suffer or experience a pullback, Constellation has remained stable.
Just look at historical data and you can see exactly what I mean. During the past decade (another thing many tech stocks can’t claim), Constellation has grown 3,871%! That’s a compound annual growth rate (CAGR) of 44.45%. During the last five years alone, that CAGR has remained still high at 35%. So if you had invested just $1,000 a decade ago, today it would be worth a whopping $30,831.33 as of writing!
Now what
Now the big question: what about today? The share price is not where it was a year ago, and in fact, is quite high at $2,204 as of writing. But what Motley Fool investors need to consider are two things: one: fundamentals, and two: long-term options.
Most stocks will continue producing returns if you’re holding them for a decade or longer. So if you’re going to spend a lot on Constellation, then I would go in thinking you’re in for the long haul. Sure, you could continue seeing the trend of 35% per year, awesome! But I wouldn’t count on it. Instead, even half that would still be incredibly impressive. Especially if you’re looking at a decade of growth. Let’s say you invested $10,000 today, a CAGR of 18% would still get you $57,676.87 in a decade!
As for fundamentals, I can’t claim the stock is cheap with a P/E ratio of 106.47, that’s for sure. But earnings per share of $20.70 is incredible. That said, there could be a market correction on the horizon for this stock. So it may be a great time to add it to your watch list at the very least and wait for a pullback.
Bottom line
Constellation is a strong company with a solid future through its acquisition strategy. If you’re an investor looking for a long-term investment with sustainable growth, Constellation is one for you.
