Constellation Software (TSX: CSU) was the perfect tech stock to buy and stash away for years, even decades, at a time. Despite the proven formula for growth and the excellent managers running the show, though, I always questioned the valuation of the name. It never really struck me as a value play in software. And after Mark Leonard announced his exit due to health reasons amid the disruptive rise of the artificial intelligence (AI) era, don’t fault me for staying on the sidelines now that shares are marked down significantly. Personally, there’s too much collective anxiety regarding the name.
While Constellation Software could easily pull off a successful pivot and continue to win big post-Leonard as it tackles AI, I’m just not sure if I want to ride the name lower, at least until the negative momentum slows a bit and things get a bit clearer.
Recently, I’ve read some articles suggesting that Constellation Software may be on the “wrong side” of the AI revolution. And I’ll admit, such commentary would concern me greatly if I were a holder at a time like this.
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Constellation stock is nosediving, but it doesn’t look cheap enough for my liking
Although it’s too early to tell if Constellation Software will miss out on the latest AI-driven boom, the shares seem to suggest a lack of confidence among investors. Personally, I think some concern is warranted, and while I’m incredibly unsure about how Constellation will navigate the new year without Mr. Leonard, I’d be more inclined to wait and see how things go before trying to bottom-fish. There’s no need to be a hero here, in my view, especially since the shares don’t strike me as being in the bargain bin quite yet. If the shares were dirt-cheap, that’d be a different story.
At 80 times trailing price-to-earnings (P/E), I think it’s hard to make a case for shares of CSU being a value bet. With shares currently down around 33% from their peak, with no signs of slowing negative momentum, I’d much rather take a raincheque and come back after a few more quarters are in the record books.
In my opinion, it’ll take more than a good quarter and more upbeat commentary from management to convince rattled investors to get back in the name, especially now that the gains from 2025 and most of 2024 have been wiped out.
Could some of the 2023 gains be taken away as well?
Time will tell. If Constellation can’t deliver a solid quarter and management can’t soothe jittery investors, I certainly wouldn’t be surprised if there’s more pain ahead before things improve for the formerly magnificent software growth sensation. There’s a lot on the line when it comes to AI. And with the untimely departure of its top boss, you really cannot fault investors for jumping ship with the intention of asking questions later.
I’d rather own Celestica over Constellation
As I’ve noted previously, you don’t have to look far for alternative plays with clearer AI game plans. And, of course, I’d rather not be in a name that’s changing CEOs at such a critical time. Though I’m not a bear on Constellation, let’s just say I’m in no rush to buy the dip. Shares may seem like a decent value on a forward-looking basis (25.5 times forward P/E), but I would like more exposure to AI.
And I think Celestica (TSX: CLS), a surging AI winner, might just be a better bet at this juncture, even if some consider its share chart to be a bit bubbly. I think there’s generational AI growth to be had here, even if the 35.5 times forward P/E is a stretch for value-minded investors. At the end of the day, Celestica is a proven AI winner. And as the AI infrastructure boom continues, demand for vital hardware is probably going to stay hot.
Is it time to offload what’s nosediving for something that’s working? Perhaps. I’d personally buy Celestica on strength rather than Constellation on weakness.
