Every investor dreams of buying a stock that can grow his $10,000 into $100,000. You don’t need to look at the Nasdaq to find such a stock. The TSX has one such resilient growth stock. Constellation Software (TSX:CSU) has made its loyal investors rich in the last 10 years.
Constellation Software’s growth history
If you invested $10,000 in Constellation Software at the start of 2014, you could have purchased 44 shares at $224.70. Today, the stock trades at around $3,760, increasing the value of your 44 shares to about $165,500. The stock grew your investment 15 times in 10 years and is still growing.
CSU surged 285% in five years and 62% in a year. Had you bought the stock during the March 2020 pandemic low for $1,200, its value would be over $30,000, tripling your money in a little less than four years.
This growth momentum shows that Constellation Software is in a long-term uptrend and breaking its record. The question is, can it sustain this growth?
Can Constellation Software continue to grow?
Constellation Software is the Berkshire Hathaway of vertical-specific software companies. Like Warren Buffett, even Constellation Software looks for companies with hidden value. Its definition of value is the mission-critical nature of the software that makes it sticky. If you understand software, the capital investment is minimal, but the potential to scale is enormous.
Software companies earn one-off revenues from licensing and continuous revenue from maintenance. Constellation earns 71% of its revenue from maintenance and generates a 6.1% net profit margin attributable to shareholders.
Constellation Software keeps acquiring small software companies that earn good cash flow from maintenance and professional fees, and grows its size. Due to the niche nature of these software companies, their organic growth is slow as they cater to a specific client base.
The software company has acquired thousands of companies that cater to hundreds of verticals worldwide. Bringing such fragmented pieces of software under one umbrella is like a jigsaw puzzle. Constellation Software created a robust business structure to acquire companies efficiently without many overlaps. It has divided its team into six operating groups and allocated a set of verticals and software solutions to each group so that two people from Constellation don’t target the same company.
For instance, Jonas acquires VSS companies that cater to hospitality, spa and fitness, and clubs and resorts verticals. It helps these verticals with construction, payments, and moving and storage solutions. Jonas gives its acquired companies autonomy to grow.
Like Jonas, Constellation’s other five groups follow the strategy of Buy and Hold forever. They use the cash proceeds from acquired companies to buy more companies, thereby compounding returns. The way compounding works, Constellation Software can continue growing for another decade and deliver 10 times growth.
How to invest in a resilient growth stock
At $3,760, buying even a single stock of Constellation Software could cost you more than half your Tax-Free Savings Account contribution limit. If you have that kind of money, buy a single share of CSU. And if you don’t have that much money, consider investing in the iShares S&P/TSX Capped Information Technology Index ETF. The ETF’s top two holdings are Constellation Software (25.98%) and Shopify (25.91%). And you can get the ETF for less than $56 per unit.
The XIT ETF surged 181% in five years and 47% in a year, against Constellation’s 285% and 62% surge, respectively. While the ETF cannot give you Constellation-like returns, it can give you decent exposure to growth.