Artificial intelligence (AI) continues to be the “it” buy right now. Yet it can be incredibly difficult to find investments that work within the space. After all, everyone and their mother is also looking for AI stocks, leaving most way too expensive to even consider. That is, unless you start looking AI ajacent.
That’s why today we’re going to consider Topicus.com (TSXV:TOI). This is a fast-growing vertical-market software stock with strong markets, high insider ownership, and continuous mergers and acquisitions. So while it’s not a pure AI stock, its investments sure are. So let’s look at why it could belong in your portfolio.
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Into earnings
To get an idea of why this is a great buy right now, let’s first look at earnings. The AI stock recently reported its second-quarter earnings, and these were nothing short of impressive. Revenue came in at €372 million, whopping 20% growth year over year. Net income was up 54% to €41.5 million as well, all while continuing to make mergers and acquisitions left and right.
In fact, TOI stated it intends to invest all free cash available to shareholders into acquisitions. And it certainly knows what it’s doing in this area. While the tech stock might look young, it’s backed by Constellation Software, another acquisition powerhouse that’s proven over decades to know just where to look for niche software. And now, TOI is doing the same thing on a European scale. And it has hardly scratched the surface.
Valuation
The question is, is TOI still valuable? In short, the AI stock has a lot going for it here as well. Its top-line growth continues to rise fast, up 20%, with profitability hitting an operating margin of about 13.2% as of writing and return on equity (ROE) at 32.6%. These are great numbers for a vertical software company.
Now it does look like it’s not exactly cheap. The share price trades at about 9 times sales, and 60 times earnings and 36 times future earnings. So this shows there are strong growth expectations for the AI stock. Even so, net leverage is moderate at €249 million in cash versus €580 million in debt.
Considerations
So let’s put this all together, because there’s a lot of growth, but perhaps not for a low price. The AI stock is dependent on acquisitions. Therefore, growth and investor returns depend on a consistent flow of these at reasonable prices and successful integration. That risk is therefore quite real. Furthermore, there’s seasonality with cash timing. The first quarter is cash-heavy because of annual maintenance billing. Other quarters can then be negative, which can complicate the short-term cash assessment.
And then there’s the share price. Paying a richer price today means less margin for error in terms of organic growth or missteps. And again, it isn’t a pure AI play. It adopts AI features and niche companies, but if you’re looking for a straight-laced AI stock, it might not be the right one for you.
Bottom line
All that said, TOI is a high-quality tech stock if you want exposure to recurring revenue, vertical software, and acquisition-powered growth. It’s not cheap. The valuation is rich and cash flow reinvested into acquisitions for more growth. While that means no dividend, it does mean higher returns in most cases.
Investors will need to watch the tech stock for further high-quality tuck-ins, sustained organic growth, expansion, and avoiding overpaying during integration. If it can do all that, the tech stock should continue to compound nicely, just as CSU has done for decades.
