Constellation Software (TSX:CSU) is one of the priciest stocks trading on the TSX. The tech stock has surged 15% year to date and is hovering above $3,700 a share. That’s more than half of your 2024 Tax-Free Savings Account (TFSA) contribution room. You can’t buy two CSU shares in your TFSA in 2024. Looking at the $3,700 price, you might wonder what made this stock so pricey. Doesn’t this price hamper its trading volume? Could the stock reach $4,000?
What makes Constellation Software stock so pricey?
Note that I used the term pricey and not expensive. Whether a stock is expensive depends on its value, measured using a company’s fundamentals like earnings per share (EPS) or sales per share. The more shares, the smaller the share in the company’s earnings and sales. It is like a pizza. The more the number of people, the smaller the slice each person gets.
Constellation Software never did a stock split. It has only 21.9 million outstanding shares on a $79.5 billion market cap. If you compare Constellation with Shopify (TSX:SHOP), the latter has 1.2 billion outstanding shares (50 times more than Constellation) on a $136.5 billion market cap. And Shopify stock is trading at $106 a share (33 times more than Constellation).
On the price front, you may think Constellation is expensive. But as I said before, a stock’s value depends on fundamentals. If we look at sales per share, Constellation stock is trading at 6.9 times its sales per share, while Shopify is trading at 14 times. Similarly, CSU is trading at 33 times its forward price-to-earnings ratio, while Shopify is at 77.5 times.
Both ratios conclude that the $106 Shopify share is more expensive than the ~$3,700 Constellation share. It clarifies why Constellation stock is a buy even at $3,700 per share.
Does the $3,700 price hurt the stock trading volume of Constellation Software?
A pricey stock is difficult to trade. Not everyone can buy 10 to 20 shares of Constellation. Thus, its average trading volume is around 27,865, compared to Shopify’s 1.06 million. If you are looking for emergency funds or short-term returns, Constellation may not be an ideal choice. Its liquidity is limited by its stock price. However, this makes it a resilient growth stock giving a compounded average growth rate (CAGR) of 20% for the last 10-plus years.
Could the stock reach $4,000?
Constellation Software is categorized as a tech stock. However, it is a holding company of niche software companies that enjoy stable cash flows. Constellation keeps acquiring small companies and uses the acquired company’s cash flow to acquire new companies. The company is working on the principle of compounding. And this only keeps growing bigger and bigger.
Constellation stock price crossed the $3,000 mark in November 2023, the $2,000 mark in August 2021, and the $1,000 mark in May 2018. As you can see, the gap between $1,000 in capital appreciation growth narrowed from three years to two. The stock could cross the $4,000 mark by November 2024, narrowing the gap to one year.
Had you invested $6,000 to buy two Constellation shares at $2,000 each in August 2021, your investment would be worth $11,100, up 85% in less than three years. So stop delaying and buy now to avoid missing out on the future rally.
