When Canadians think of growth stocks, stocks from the Canadian tech sector are most likely to be the names that come to mind. Or that was the case between 2020 and 2021. Since the selloff frenzy amid the pandemic-induced panic and tech sector meltdown, many Canadians might consider tech stocks only high-risk investments with little chance of solid growth.
However, not all Canadian tech stocks carry a rapid and high-growth potential accompanied by a significant degree of capital risk. When Canadians think of tech stocks, the multifold returns from Shopify stock or Lightspeed Commerce stock might immediately spring to mind.
However, there is a slightly lesser-known Canadian tech stock that warrants more attention from investors: Constellation Software (TSX:CSU).
Constellation Software
Constellation Software is a giant in the Canadian tech space that has outpaced the broader market by substantial margins since its initial public offering (IPO). Debuting on the TSX in May 2006, it has returned over 19,680% to its investors in less than two decades. If you also include the returns through shareholder dividends over the years, the percentage stands over a staggering 24,480%.
Yes, even though it is a tech stock, Constellation Software pays its shareholders their dividends at a quarterly schedule. As of this writing, Constellation Software stock trades for $3,660.89 per share. While nominal, it pays its investors their distributions at a 0.15% dividend yield.
What does it do?
Constellation Software is a $77.58 billion market capitalization diversified software company headquartered in Toronto. The firm is in the business of acquiring, managing, and building various vertical market software businesses.
The companies it acquires and builds typically offer software solutions for private and public sectors to customers in niche markets. By delivering essential software solutions, it also boasts a high customer engagement and retention rate.
Instead of investing in startups or up-and-coming companies, Constellation Software focuses entirely on high-growth potential and high-profit-margin companies.
Its strategic acquisitions approach has been the primary reason for the company to drive shareholder value growth and cash flows for the giant. The company generates revenues through license, maintenance, and professional fees, alongside hardware sales.
How has it been doing?
The third quarter of 2023 saw CSU stock report a 23% growth in its revenue from the same quarter in the previous year. The last three quarters have seen its sales grow by 27%, despite the harsh macroeconomic environment over the last couple of years. The company’s acquisitions and organic sales were the primary reasons for its top-line growth in the third quarter of fiscal 2023.
The company ended the quarter with $1.03 billion in liquidity, a jump from $811 million at the end of 2022. While its debt balance increased to $3 billion from $1.97 billion in this period, it used the funds to make calculated acquisitions to further diversify and bolster its revenues.
Foolish takeaway
Analysts anticipate the tech stock to grow its adjusted earnings by over 40% per year between 2024 and 2027. Considering the expected earnings growth, its seemingly expensive valuation of 35.09 times forward earnings makes it a reasonably priced stock.
While it might not offer returns similar to the past two decades in the coming years, it can still be considered an excellent tech stock to own for long-term capital gains.
