Constellation Software (TSX: CSU) stock fell 12% in September as tariff wars escalated and fears of an interest rate hike set a bearish tone for the market. The stock has been on a downtrend since May 2025 after founder Mark Leonard abruptly stepped down. No succession, no smooth transition. For a company that operates as a venture capital firm, its strength is the founder’s discipline in valuing a company, retaining permanent ownership, and constructing incentive and return structures for shareholders.
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Why did the market punish this stock?
Most investors were invested in Constellation stock because of the trust, loyalty, and reputation Leonard built over the years. Constellation never issued share-based compensation, nor bought back shares or diluted them. The executives had to buy stock with their own money, bringing skin in the game.
Leonard even stopped doing quarterly earnings calls in 2018, and still Constellation stock soared at an average annual rate of 30%. That showed the level of trust he had built. Thus, it comes as no surprise that some investors exited after Leonard stepped down for health reasons.
Another core reason Constellation Software stock got punished was the artificial intelligence (AI) anxiety. With AI writing codes, investors were concerned that reduced software development costs could make Constellation’s over 1,000 vertical-specific software (VSS) portfolio obsolete. Its portfolio comprises many small software companies whose code was written in the 1990s and has been sticky with small business owners.
How AI will impact Constellation’s business model is a black box. Its current CEO, Mark Miller, has been honest about AI concerns, saying it is too early to say. “We are not going to give you an AI target, an AI revenue line, or an AI timeline. If we start reporting a number like that, we will start managing to it,” he said. Investors were not happy with the uncertainty in the answer, leading to a sharp correction.
The market has punished this stock enough
The same two reasons can also be viewed from a contrarian angle. Let’s begin with AI. The AI anxiety has deeply discounted software stocks. Many software company founders are willing to sell their companies at deep discounts, creating several acquisition opportunities for Constellation.
While I am not denying the AI threat, Constellation hasn’t reported any significant churn from VSS. Their software is vertically integrated three to four layers deep into the business, customized to the business, industry, and city rules. They are so mission-critical to the working of the business and rarely cost a single-digit percentage of operating costs. Transferring years of data, formulas, and rules is a hassle, and businesses may not want to bear the cost of switching software until AI can give something more.
While AI may not see churn in old customers, acquiring new customers might be difficult, as new-generation entrepreneurs build AI-first companies. Constellation’s portfolio companies are experimenting with AI at their individual company level. Constellation’s decentralized leadership allows companies to operate individually and be responsible for their own profit and loss. This mitigates the risk of AI failure for Constellation as a holding company. Thus, AI anxiety, although real, has already been priced in.
As for management change, Mark Miller has to win investors’ trust. To that end, he has restarted earnings calls and tweaked the strategy. Instead of acquiring small VSS worth $5–$10 million, Constellation is acquiring minority stakes in larger public companies under the Permanent Engaged Minority Shareholder (PEMS) investments. This strategy shift is necessary, as other venture capitalists are replicating Constellation’s strategy, making VSS company prices competitive.
Moreover, Constellation is earning close to $1.7 billion in cash annually, which it needs to reinvest. Sticking to $10 million annual revenue companies will require Constellation to acquire several companies to use up its free cash flow. Constellation is unwilling to buy these small companies at a premium and reduce its internal rate of return. Hence, it is targeting larger public companies at distressed valuations. It remains to be seen how the new strategy fares.
Buy Constellation stock before sentiments turn
Like all private equity firms, Constellation’s initial returns may be slow as the company spent capital to acquire the company. Once the PEMS strategy starts generating returns, sentiment may change and drive the stock price.
