The return of many top growth stocks in this market has been what’s kept indices moving higher, broadly speaking. And that’s true in the Canadian market as well, with tech giants like Constellation Software (TSX:CSU) continuing to provide sky-high growth for investors. One look at the stock chart below is what most investors need to see in order to understand why this top growth stock continues to drive so much interest.
With a market capitalization of more than $90 billion, Constellation Software is certainly a giant in the software sector that I’d argue should get more attention than it already does. Here’s why a $1,000 investment in Constellation Software may be a wise move, given its track record of reliable performance and steady growth.
Strong underlying business model
I think when it comes to any growth stock, assessing the company’s underlying model and how it could achieve similar results in the future is important. Indeed, looking at the financials matters (where a company has already travelled could indicate its pace of future travel). However, I think both the company’s underlying model and its past results point in the same direction, which is a good thing for long-term investors.
Constellation Software has grown to its remarkable size over the years by employing a growth-by-acquisition business model. What this means is that Constellation essentially focuses on consolidating a fragmented software startup space, paying reasonable prices for high-growth companies early in their development. Bringing these companies into Constellation’s portfolio can provide the liquidity and financing boost to get these companies up and running (and very profitable) over the long term. Rinse and repeat. That’s it.
This model has translated into strong results in past quarters, and it’s the company’s consistent earnings beats that have led to the chart you see above. With 20% revenue growth this past quarter and more strategic acquisitions planned, this is a company that’s still growing at a very fast pace, given its size.
Future prospects remain bright
Of course, the question that must be asked moving forward is whether such growth rates can be maintained. I think the answer is yes.
The company’s growth model is based on finding small to mid-sized vertical market software companies that have steady clientele and room to grow. With tens of thousands of such options available on the market, the Constellation merger and acquisition team will likely continue to have a field day picking over the myriad of options and bringing the best companies under its umbrella over time. As the company grows, so too will its deal size, so I’d expect more interest in this company as it invests in companies with artificial intelligence-related business models and other focal areas that could provide outsized growth.
Of course, risks exist with Constellation (and any growth stock, for that matter) right now. But over the long-term, this is one Canadian growth stock I think can continue to outperform. For those with an investing time horizon longer than five years, this is a top holding I think is worth considering right now.
