Constellation Software Stock (TSX:CSU) Surged Last Month: Still a Buy?

Is Constellation still a buy after its surge last month? Let’s find out..

| More on:
money cash dividends

Image source: Getty Images

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.

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.

More on Tech Stocks

work from home
Tech Stocks

Could Lightspeed Stock Be a Big Winner in 2023?

Investors can capitalize on Lightspeed’s low valuation and benefit from the recovery in its price.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Tech Stocks

TFSA Passive Income: How I’m Investing to Make $2,000/Year From Dividends

I am increasing my dividend income by investing in dividend stocks like the Toronto-Dominion Bank.

Read more »

Electric car being charged
Tech Stocks

Is Now The Time to Buy EV Stocks?

EV stocks may be down now, but don't count them out. They'll soon be back up again, so now may…

Read more »

Happy shoppers look at a cellphone.
Tech Stocks

Better Buy: Amazon vs. Apple Stock

While both Amazon and Apple have bright long-term prospects, Apple stock looks like the best tech company to invest in…

Read more »

A stock price graph showing declines
Tech Stocks

Has Blackberry Stock Finally Stopped the Slide?

Blackberry has not yet delivered the kind of financial results that we know it can, but this is about to…

Read more »

Car, EV, electric vehicle
Tech Stocks

Chinese Stocks are Soaring: This TSX Stock Could Gain

Magna International stock could benefit from China's economic re-opening.

Read more »

Money growing in soil , Business success concept.
Tech Stocks

1 Oversold Growth Stock to Buy for Major Returns in 2023

This growth stock could be the best Canadian stock to buy now for 2023, with shares possibly doubling back to…

Read more »

Hands holding trophy cup on sky background
Tech Stocks

Could BlackBerry Stock Be a Big Winner in 2023?

BlackBerry (TSX:BB) stock more than halved last year amid the tech stock selloff. Could 2023 be a winning year for…

Read more »