Even though that’s all that investors do (or attempt to do), accurately predicting the market is nearly impossible. There are simply too many variables to keep track of and many unknowns in the equation.
The next best thing is learning from past patterns how markets will perform in the presence of certain catalysts, like interest rate cuts or economic booms. But even that’s not an exact science because these catalysts are also tied to other factors like existing market sentiment, investor confidence, etc.
The prediction becomes even more complex when you start looking at a specific stock because now you have to account for factors specific to the sector the stock belongs to and the underlying business.
Still, taking an educated guess at how a stock like Constellation Software (TSX: CSU) might perform in the next three to five years is critical before you make a buy, sell, or hold decision.
The probability of going up
The strongest endorsement of the notion that Constellation Software’s stock will be higher than it is right now (after three years) is its history.
Apart from relatively brief bear market phases and a few periods of stagnation, the stock has gone up consistently and tremendously in the last 18 years. It was trading below $20 per share in 2006 and is currently at $4,375. This 23,800% growth in less than two decades is almost unprecedented.
Every time disbelievers of this stock think that it has hit the ceiling, the stock goes up again. It’s also incredibly resilient and has sailed through multiple tech sector correction phases with minimal dips. The most recent example is the 2022-2023 dip, where the sector’s index fell almost 50%, whereas the stock barely fell 16%.
Its business model, finances, global footprint, and even its roots in a wide variety of vertical markets are also among some of its characteristic strengths — hence, the easy prediction is that unless a uniquely powerful catalyst (sector or market-wide) pushes it down, the stock is highly likely to be much higher than it is now. This stock’s current “high” prediction is close to $5,000 per share.
The probability of going down
The probability of Constellation going down, assuming there isn’t a strong bear market or a market crash, is relatively low. However, it is prudent to consider that software development is going through a fundamental transformation thanks to artificial intelligence (AI). We are already seeing its impact. AI-triggered layoffs have become a common occurrence, especially in the tech sector.
Ironically, this can go one of two ways for Constellation. If the companies in its portfolio adopt AI wisely and swiftly, lowering headcount while increasing productivity, the AI revolution might significantly enhance its finances and accelerate growth.
However, if new AI startups and tools start making the companies in its portfolio obsolete (in their respective areas of expertise), the company might be too weighed down to sustain its exceptional growth pace.
Foolish takeaway
There is a decent chance that Constellation Software will be trading above $5,000 per share in the next three years, and that’s a conservative positive outlook. The stock has almost doubled in the last three years, and if it manages to replicate this performance in the next three years, the tech stock will be at a much higher price point.
