Constellation Software Inc. (TSX: CSU) stock is a Canada-based global provider of software and services to a large and diverse customer base. This customer base is diversified across geographies and industries, providing Constellation with strong, consistent cash flows.
The company has grown primarily through acquisitions over the last many years, but organic growth has historically been a consistent and steady 5%. Recently, this growth rate has seemingly slowed. What should shareholders do about this? Is it a cause for concern?
Let’s take a look.
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Constellation Software’s stock price takes a hit
Valuations for the software sector as a whole have taken a hit, with many getting swept up in a sector-wide pullback. As you can see from CSU’s stock price graph below, Constellation Software’s stock price has fallen 35% from its 2025 highs.
Beyond this, however, there are other, company-specific issues. The main one is the slowing of Constellation’s organic growth rate. In fact, the company’s second-quarter result highlights the issue – CSU stock reported an organic growth rate of a mere 3%. This compares to a 6% organic growth rate in the first quarter and an historical average growth rate of approximately 5%.
Focus on the long term and big picture
Despite this slowing organic growth rate, overall revenue grew a healthy 17% to $3.3 billion, and cash flows from operations increased 10% to $477 million.
Regarding the disappointing organic growth rate, management explained this low by citing one-time events or items that skewed the real picture. For example, Altera, which Constellation acquired in 2022, posted stronger growth last year. This tough comparable impacted this year’s organic growth rate.
So, after adjusting for foreign exchange, Constellation Software posted a mere 1% organic growth rate. This is low. But basically, this is attributed to one-time items and accounting-related issues. Without these, organic growth was as expected, according to management. In their view, this is not a trend and in line with historical averages.
Constellation Software is an acquisition story
The company’s growth story has been primarily a story of growth through acquisitions. This has fueled a 130% increase in annual revenue since 2021, and a more than doubling of cash flow from operations. The real question that I’m concerned with is whether these acquisitions are achieving attractive internal rates of return (IRR) over the long term. And they are. For example, according to management, the Altera acquisition is tracking ahead of expectations in terms of IRR. With their IRR hurdle rate ranging between 20% to 30%, it’s no surprise that the company has been generating such healthy amounts of cash flows.
Importantly, acquisition activity and opportunities remain strong and this is so important to me when I evaluate Constellation Software. In fact, the company has deployed US$1.6 billion toward acquisitions in the first half of 2026. Subsequent to the first half, acquisition activity has remained strong, with more than US$800 million in acquisition activity.
The bottom line
One quarter of weak reported organic growth rates doesn’t sour my opinion on Constellation Software’s stock. The company continues to barrel forward in its proven and successful acquisition strategy, with high returns and strong cash flow results.
Finally, investors are worried about artificial intelligence’s (AI) threat to software companies, so maybe they’re just overly cautious and nervous. As Constellation’s management has noted, AI is improving the software development process by making it faster, with productivity improvements. AI has the potential to bring a lot of upside to Constellation Software’s processes and customers.
I’d hold on to CSU stock and remain focused on the long-term.
