Software stocks picked up momentum in the latest earnings season, which began in late July. Microsoft and Amazon reported strong revenue and earnings growth in cloud and artificial intelligence (AI). Riding the momentum rally, Constellation Software (TSX: CSU) stock surged 28.8% from July 23, 2026, onwards, but pulled back 6.8% after reporting its second-quarter earnings on August 12.
The long-term growth stock that has compounded the wealth of its loyal shareholders saw its valuation halve after the sudden exit of its founder, Mark Leonard, in July 2025. Can you judge a long-term growth stock like Constellation from just a single quarter of earnings? Not exactly.
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Why did Constellation Software stock fall 6.8% after earnings?
Constellation saw a 17% year-over-year increase in revenue, a 20% increase in operating expenses, and a 57% increase in free cash flow (FCF) in the second quarter of 2026. Unlike other operating companies, Constellation’s bottom-line growth is higher because of the nature of its business.
Constellation Software operates as a private equity firm for vertical-specific software (VSS) companies that enjoy sticky and recurring cash flow from maintenance services. It acquires these companies, improves their operational efficiency and profitability while allowing them to work independently. In return, it gets higher earnings per share (EPS) and free cash flow available to shareholders, which it uses to buy more VSS companies.
Constellation’s strong double-digit EPS and FCF growth is fuelled by acquisitions instead of organic growth. This is because Constellation acquires mature companies with niche cash flow. It acquires these companies from individual founders, private equity (PE) portfolio managers, and carve-outs from large companies. Constellation offers them an exit opportunity by acquiring their company at a discount.
Despite knowing that FCF and EPS growth are key growth drivers, investors discounted Constellation stock for slower organic growth from large acquisitions.
Is Constellation Software a good stock to buy now?
The current dip is a good opportunity to buy Constellation stock. It can be a good diversification for your portfolio as it gives you exposure to a different asset class. Private equity firms need patient capital to identify companies that have scope to improve profitability or turn around losses, acquire them at good prices, and generate returns.
Constellation has converted private equity into ongoing operations, whereby it is self-funding new acquisitions from the FCF from previous acquisitions. The higher the FCF, the more money it has to make acquisitions. Earlier, it acquired small companies in the range of $5–$10 million. Now it is targeting companies worth $100 million and above. The larger companies are more complex to manage and generate returns.
Most of the companies it acquires are niche companies that do not expand or grow revenue much. Not all software companies are Microsoft or Amazon that need widespread adoption to scale operations. Most software companies are like Springer-Miller Systems, which offers hospitality management systems to hotels, resorts, and spas. The owner sells their stake to Constellation. The acquired company continues to operate as usual with the same employees, with a tweak in the management approach towards profitability.
Constellation’s dip comes as the shift to larger acquisitions is dragging returns. But once the turnaround of portfolio companies picks up momentum, its share price could surge.
The AI opportunity and risk
Another core reason behind the halving of Constellation’s share price in the last 12 months was AI uncertainty. The fear of AI replacing software jobs pulled down all software stocks. Even Constellation kept an eye on the AI opportunity and how to pursue it.
Mark Miller talked about Constellation’s AI approach in detail at the second-quarter earnings call. The company is using AI internally and for clients. Its operating companies are using powerful AI tools to offer AI applications to its clients. However, selling AI products is different than developing them. Customers should know what is possible and be willing to shell out extra for AI.
Constellation’s decentralized AI approach helps its AI strategy to be flexible and diversified. It can easily dispose of strategies that didn’t work and unlock any potential benefit. Constellation has not yet disclosed the AI expense but is working towards reducing management.
