Better Buy: Shopify vs. Constellation Software

Are you interested in buying a tech stock? Find out which is the better buy between Shopify and Constellation Software.

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The Canadian stock market features many outstanding companies. In the tech sector alone, investors can find two of what I would call generational companies. Those are Shopify (TSX:SHOP) and Constellation Software (TSX:CSU). Both companies have had runs where they have managed to outperform the broader market by a wide margin. In addition, both Shopify and Constellation Software have managed to establish themselves as clear leaders in their respective industries.

However, both stocks are somewhat expensive to buy on a per-share basis. That means, newer investors may not be able to buy shares of both companies. In this article, I’ll discuss which stock is a better buy today.

Company background

Shopify may be more well known by newer investors. This is because Shopify’s business is more consumer facing. This company provides a platform and many of the tools necessary for businesses to operate online stores. It’s not very hard to notice when a company is using its platform. For the most part, the Shopify website templates that are used by merchants are very recognizable. One of the most high-profile names to use Shopify’s platform may be Netflix.

Although Shopify may be more well known, that doesn’t mean Constellation Software should be passed on. This company operates in the background, acquiring vertical market software (VMS) businesses. Since its founding, Constellation Software has acquired hundreds of businesses, growing its portfolio to an astronomical size. When looking at similar companies, there are so few that have managed to become as successful, as Constellation Software over the past decade and a half.

Looking at the numbers

When comparing recent stock performance, Constellation Software clearly wins out. Over the past year, Constellation Software has gained about 9.3%. It should be noted that, since its initial public offering, Constellation Software has averaged an average gain of about 30% per year. That means its past year performance has been very below average for the company.

There are a few factors that have contributed to this. I think the biggest factor is the rising interest rate, which makes it a very difficult environment for companies to grow and even more difficult for acquisition-based businesses to find attractive opportunities.

However, Shopify stock has fallen about 30.6% over the past year. This is a huge change in performance compared to what investors were used to in 2021 and prior. For most of its history on the public markets, Shopify stock had been one of the best stocks on the TSX. In fact, in 2020, the company ranked as the best-performing stock in Canada, over a running three-year period.

Like Constellation Software, the current economic environment has been very difficult on this company. I believe Shopify still has a bright future ahead due to its outstanding positioning within the rapidly growing e-commerce industry. However, it may be a very long time before this stock returns to its previous highs.

Which stock is the better buy?

There’s no denying that I’m a fan of both companies. However, considering the momentum that both stocks have, I would say Constellation Software is the better buy today. This stock has already managed to achieve new all-time highs, despite being negatively affected in 2022, alongside the other tech stocks on the market. I think Shopify could very well perform outstandingly over the next decade, but if I were to suggest a tech stock today, it would definitely be Constellation Software.

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 Jed Lloren has positions in Constellation Software and Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Constellation Software and Netflix. The Motley Fool has a disclosure policy.

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