At a time when the uncertainty around Trump tariffs is stressing economic growth worldwide and pulling down global stock indices, one stock is rising like a phoenix. Constellation Software (TSX:CSU) stock surged more than 11% year to date when the TSX Composite Index fell -0.56% and the tech-heavy Nasdaq 100 Index fell 3.69%. It makes one curious: what to expect from Constellation Software in 2025.
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Effect of compounding
The company runs on the principle of compounding, a method that has tested the worst of crises. Compounding keeps reinvesting the investment earnings to make more money, irrespective of the market conditions. Investor sentiments and liquidity are among the factors that influence the stock market.
Consistent buying during the up and down cycle helps reduce the average cost per share and generates benefits in the long term. Years of compounding are the reason why Warren Buffett’s portfolio can handle all types of crises today.
Constellation Software outlook for 2025
Constellation Software keeps acquiring vertical-specific software companies that earn recurring cash flows from maintenance and have a sticky customer base. It reinvests this money to acquire more companies, which adds to its cash flow.
In 2024, Constellation spent US$1,792 million in acquisitions and obtained US$164 million in cash from these acquisitions. This cash is recurring, and the organic growth of the previously acquired companies is 1-2%. Its operating cash flow is highest in the first quarter and lowest in the second quarter because of annual maintenance contract renewals. Maintenance makes up for 73.5% of its revenue.
If you look at Constellation’s business as a shareholder, its earnings increase in a bear market as it makes some lucrative acquisitions at a significant discount. It gets the same cash flow but pays less to acquire them.
Constellation’s revenue growth moderated to 20% in 2024 since the pandemic as tech stocks rallied. However, its earnings per share (EPS) grew 29% as operating efficiencies improved. Trump’s tariffs have created bear market momentum, allowing Constellation to make some value acquisitions.
| Year | CSU Revenue (in billions) | Revenue Growth | CSU EPS | EPS Growth |
| 2014 | $1.68 | 39% | $4.87 | 11% |
| 2015 | $1.84 | 10% | $8.36 | 72% |
| 2016 | $2.13 | 15% | $9.76 | 17% |
| 2017 | $2.48 | 17% | $10.47 | 7% |
| 2018 | $3.06 | 23% | $17.90 | 71% |
| 2019 | $3.49 | 14% | $15.73 | -12% |
| 2020 | $3.97 | 14% | $20.59 | 31% |
| 2021 | $5.11 | 29% | $14.65 | -29% |
| 2022 | $6.62 | 30% | $24.18 | 65% |
| 2023 | $8.41 | 27% | $26.67 | 10% |
| 2024 | $10.06 | 20% | $34.48 | 29% |
| 10-year CAGR | 18.5% | 15.2% |
Is Constellation Software stock a buy?
Constellation Software stock is currently rallying on its strong earnings. However, it did slide 13% in December 2024 when the entire market was in the sell mode. Taking a leaf from Constellation’s playbook, you could use the compounding strategy and buy the stock whenever it dips. Avoid waiting for the stock to keep falling, as it will rise when the compounding effect of buying cheap kicks in.
The stock has just surged. You can consider buying it when the stock price falls by 8-10%, which is its normal correction. You could also keep accumulating this stock at every dip. The price of one share goes up to almost $4,950, and by the time you have that much money to invest it might cross $5,000. However, buying even one share can double your money in five years or less if it continues its compounded annual growth rate of over 20%.
