Constellation Software (TSX:CSU) and Shopify (TSX:SHOP) are two of Canada’s most popular tech stocks. The former is a tech holding company that has been popular for many years and remains popular today. The latter is an e-commerce giant that was once very popular but has fallen out of favour. The two companies would appear to have little in common, but looks can be deceiving.
While Shopify and Constellation are different, they’re both Canadian, they’re both large caps, and they’re both technology companies. So, they are similar enough to be worth comparing.
In this article I will compare the two stocks side by side, so you can decide which technology stock is better suited to your portfolio.
The case for Constellation Software
The case for Constellation Software comes down to valuation and profitability.
Constellation Software is a pretty profitable company. In its most recent quarter, it delivered the following:
- $1.72 billion in revenue, up 33%
- $136 million in net income, up 28%
- $321 million in cash from operations, up 10%
- $229 million in free cash flow, up 1.3%
Based on this information, we can conclude that Constellation Software was profitable last quarter. Its net margin (i.e., profit margin using net income) was 7.9%. Its free cash flow margin (i.e., profit margin using free cash flow) was 13.3%. The net margin figure was “decent,” while the free cash flow margin was very strong. So, we’d give CSU decent marks for profitability last quarter.
It’s the same when it comes to growth. As the bullet points above show, CSU had growth in the double digits last quarter in all metrics except for free cash flow. One little caveat worth mentioning is that organic growth (i.e., growth minus the effects of acquisitions) was -3%; it was acquisitions that took growth into the double digits. However, Constellation has a good track record with acquisitions, so I wouldn’t hold that factor against this specific company.
Despite having strong profitability and growth, Constellation stock is not horribly expensive. At today’s prices, it trades at the following:
- 36 times earnings
- 5.7 times sales
- 28.45 times operating cash flow
This is an expensive valuation — don’t get me wrong, but CSU is cheaper than SHOP, which sits at a mighty high 9.81 price-to-sales ratio and isn’t profitable.
The case for Shopify
The case for Shopify as opposed to Constellation rests on the fact that Shopify has more organic growth. In its most recent quarter, SHOP increased its revenue by 26%, and its gross merchandise volume by 13%.
Now, you might be wondering why I’m calling that “faster growth” than Constellation, given that that company’s top line grew by 33%. The reason is that Shopify’s growth was mostly organic. SHOP didn’t buy any companies last quarter, Constellation did. It has spent over $1 billion in the last 12 months buying companies. Take out the effects of those deals, and Constellation’s growth was -3%. With that one small adjustment, you get Shopify growing far faster than Constellation.
The problem, of course, is that SHOP isn’t profitable. It was profitable for a few brief quarters in 2020 and 2021, but it lost that distinction when its expenses increased and its investments declined in value. SHOP could turn things around. But in fundamental terms, CSU looks like a safer investment.
