Buying a cheap stock is not about the price of one share but about the value of that one share. How does a share derive its value? That depends on the company’s core business and which financial metric best describes its performance. For a high-volume grocery store, its value lies in its sales performance. Thus, the value of the share price is measured against sales per share and future sales growth. If that ratio is low, it means the market has not priced in its sales growth potential, making the stock cheap given the value it offers.
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This Canadian stock has dipped to its two-year low
Constellation Software (TSX: CSU) stock has dipped 34% since mid-July, its steepest dip since the 2022 tech meltdown. It is trading around $3,230, a level last seen in December 2023. This time, the dip is because of both internal and external factors. Internally, its founder, Mark Leonard, announced a sudden resignation due to health reasons. Leonard will remain as a Director on the Board, and Chief Operating Officer Mark Miller has taken the CEO’s role.
Ideally, the management is stable as an internal person has become the CEO. However, the exit of a founder is difficult news to digest, as many big shareholders stay invested because of the trust they have in the owner.
Until the transition of duties is complete and investors gain trust in Mark Miller, the stock price may see downward pressure.
The external factor that has been pulling down Constellation stock is the uncertainty around interest rate cuts by the US Fed, which has affected all tech stocks with high valuations. Moreover, the increasing adoption of artificial intelligence (AI), which Mark Leonard acknowledged, could have an impact on traditional software companies. However, the impact of AI has not yet been reflected in earnings.
Constellation is monitoring the trend and could adopt its strategy to monetize on the trend.
This Canadian stock hasn’t been this cheap in years
The 34% dip has reduced its valuation, as its revenue, earnings, and free cash flow (FCF) continued to grow by strong double-digit rates. Revenue surged 16%, net income 28%, and FCF 46% in the third quarter of 2025. The dip in share price and increase in fundamentals have lowered the price ratios.
Constellation acquires vertical-specific software companies with stable free cash flow from maintenance contracts. It then uses that FCF to acquire more such companies, thereby compounding FCF growth and increasing its enterprise value.
The value of Constellation lies in its enterprise value (EV) and FCF. The EV/ Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) ratio has dipped to its January 2017 levels of 22 times. The price-to-free cash flow has dipped to its January 2021 level of 31 times. These valuations have made Constellation stock cheap at its current price of $3,230.
Should you buy Constellation Software at the dip?
One possibility for the dip could be that investors have priced in their fears around the new management being able to sustain the high double-digit FCF growth with the right acquisitions. That is a risk, but the reward of taking the risk is a 45% upside from a recovery rally. Since the stock is oversold, with a Relative Strength Index (RSI) of 39, the downside risk is less. The favourable risk-reward trade-off makes Constellation stock a bargain.
