The TSX Composite Index has recovered from the bear momentum triggered by the U.S. tariff situation, surging 15.4% from April 4, when tariffs were imposed. The market surged as businesses and investors got clarity on the road ahead. While energy and lending stocks underperformed, a few tech stocks outperformed the market. Among them were Shopify (TSX:SHOP) and Constellation Software (TSX:CSU), which surged 41% and 18.3%, respectively.
However, do not allocate your investments looking at the short-term rally. The long-term growth story is different for both.
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Investment case of Shopify
Shopify is a seasonal stock, with the share price picking up momentum during the second half, ahead of the holiday season. The company is sensitive to consumers’ spending habits. However, its flywheel concept has set the wheel rolling. Merchants are actively using Shopify to set up their online stores and drive gross merchandise volume (GMV).
Shopify’s asset-light model has successfully achieved eight consecutive quarters of 25% pro-forma revenue growth, and seven consecutive quarters of over 20% GMV growth and positive free cash flow.
What does this mean?
The company’s mid-20% revenue growth could be its new normal. It could sustain this growth even in a weak macroeconomic environment in which consumer discretionary spending is falling. The company needs strong economic growth and peak consumer spending to report higher revenue and earnings growth rates, as merchants will use more services of Shopify to accelerate growth.
Even with the tepid economic growth of the last two years, Shopify stock surged 118% as investors priced in positive free cash flow (FCF). The next growth cycle will be driven by higher free cash flow growth. In the first quarter of 2025, FCF increased by 56% year-over-year to $363 million.
Investment case of Constellation Software
While Shopify stock grows seasonally, Constellation Software stock grows consistently. Although Constellation earns recurring revenue from software maintenance, it functions as a private equity firm. The company constantly looks to acquire small vertical-specific software companies that have strong recurring maintenance revenue. It acquires them and provides administrative and other support while allowing the acquired company to operate individually.
Constellation uses the cash flow of the acquired company to acquire more companies, compounding returns.
Unlike Shopify, Constellation has been FCF positive for a long time. While revenue grows by mid-teens to mid-20s every year, FCF growth is volatile. There are some years of accelerated FCF and some years of FCF decline, depending on the success of the acquisitions. Constellation always strives to acquire companies at a good value, but the value keeps fluctuating. It makes expensive acquisitions in the bull market, which pulls down its FCF. That is offset by value acquisitions in a bear market that boost FCF. Overall, its cumulative long-term growth is a strong double-digit.
The CSU stock price is on a long-term growth trend, making it a buy at every dip.
Shopify vs. Constellation Software
Now, for the question, which is a better stock for you?
Both stocks are a good investment as they have consistent revenue and free cash flow growth. However, your portfolio is customized to your financial needs and risk tolerance capacity. One stock is volatile and one is resilient.
Shopify is riding the e-commerce wave and has the potential to grow further organically through more transactions happening on its platform. Since its performance depends on individual consumers, the stock price will remain volatile.
Meanwhile, Constellation grows through acquisition and mostly has enterprise clients, resulting in limited competitors and a sticky platform.
If your investment time horizon is shorter and you have a higher risk-bearing capacity, Shopify could be your first choice. Meanwhile, if you are looking for a low-risk but assured return stock, Constellation stock is a buy.
If you have $8,000 available for investment, you could buy one stock of Constellation, which has crossed $5,000, and the rest of the money can be used to buy Shopify. The two stocks could give your portfolio a balance of risk and reward.
