As volatility looks to prevail through the summer months as investors digest what could be one of the more active starts to the second half in recent memory, questions linger as to whether or not there’s still deep value to be had out there.
Indeed, increased volatility in the tech and AI trades could be a yellow or red flag for some. And the continued pains within SaaS might be a reason to steer clear of the tech sector entirely. At least until things settle down and we’re given a bit more clarity on where the economy goes from here, as AI advances while pushing firms to raise the bar on their prices due to higher DRAM and NAND costs.
AI is still a long-term disinflationary or even deflationary force. But in these earlier days of the buildout and boom in the hardware “picks and shovels,” it’s starting to look like it’s adding to inflation that’s already become quite heated in recent quarters. Any way you look at it, though, I still think there’s value, especially in the deep end of the waters, where few investors may dare to venture.
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Constellation Software stock looks like a huge bargain right here
Personally, I think a name like Constellation Software (TSX: CSU) looks like a stellar market bargain while the shares attempt to stage a comeback from a vicious share price haircut in excess of 50%. In the past three months, the stock has been up 18%.
And while time will tell if this is the bottom, I do think that the AI fear has been more than priced into the valuation at this point. Sure, AI is a disruptive force, but don’t think that Constellation Software’s business model is going to fall underwater overnight. If anything, Constellation is in some of the more resilient names across the software space.
And, believe it or not, AI might actually act as a catalyst to help level up the portfolio of software. In any case, switching costs remain high when it comes to some forms of software. And until the renewal rates implode, I wouldn’t be so quick to bet against Constellation, especially as AI acts as a new feature to upsell existing clientele. As Constellation looks through the AI-driven software wreckage, I think there are opportunities for the software firm to get more for its investment dollar.
Getting cheap enough to back up the truck on in spite of AI unknowns
Though $2,800 per share seems like a steep price to pay, I do think that the price of admission (16.6 times forward price-to-earnings) is more than reasonable, especially as the firm starts deploying capital at a time when software has arguably never been this cheap.
Constellation has plenty of cash, ample options, and you can bet that the firm will be busy looking to make the most of a chaotic environment that might just allow for big bargains to be had, especially as firms look to make radical moves to get on the right side of the AI wave.
