Tech stocks are regaining investor optimism, as investors pounce on every opportunity that uses artificial intelligence (AI). Tech companies are investing heavily in developing their own version of ChatGPT and refining the rough edges. Amid this tech boom, two TSX tech titans, BlackBerry (TSX:BB) and Constellation Software (TSX:CSU), saw double-digit growth of 48.2% and 27.7% year to date.
Despite being from the same software services industry, the two have a stark contrast in how they operate and give returns to shareholders.
Risk and return: BlackBerry vs. Constellation Software
BlackBerry is a small-cap stock as volatile as a newly traded tech stock. The stock hasn’t seen stable growth since 2007 after Apple’s iPhone disrupted its mobile phone market. BlackBerry’s stock is more range-bound and hovers between $4 and $10. The one time it made a high of almost $18 was in January 2021. The jump came because Redditors used short-selling to make quick profits by artificially inflating the stock price.
BlackBerry’s volatility and range bound makes it a suitable bet for active investors with a high-risk appetite. They can make 40-50% returns through active investing.
For risk-averse investors that seek growth, Constellation Software gives stable and steady growth with limited downside. And if you think the more than $2,700 stock price is expensive, look at the stock’s consistent growth. It has kept beating its own high over the long term.
In June 2018, when CSU stock crossed the $1,000 mark, many thought it is too expensive. It dipped 20% in the second half of 2018, as tech was at the centre of the United States-China trade war. But the stock doubled in over three years to reach the $2,000 mark in October 2021, and now it aims for $3,000. It is a stock you can buy and hold for the long term, as it generated compound annual growth rate (CAGR) of over 32% in the last 10 years.
What sets the two stocks poles apart?
Business model: BlackBerry vs. Constellation Software
BlackBerry builds its own technology, an endpoint cybersecurity platform mainly used by governments and QNX software for niche verticals like automotive and the Internet of Things (IoT) devices. Its dependence on governments and automobiles makes the stock sensitive to the auto industry and macro trends.
For instance, BlackBerry stock fell 70% between June 2021 and December 2022 as automakers faced severe chip supply shortages. It piled up QNX royalty revenue from automotive production. (The company collects royalty at the design phase and production phase.) Moreover, things worsened in November 2021, as the government delayed cybersecurity contracts amid macro weakness.
However, this is not the case with Constellation. It has a well-diversified portfolio of +500 small software companies that offer mission-critical software to niche verticals across various industries and geographies. Unlike BlackBerry, Constellation doesn’t have a specific product. It is an investor that acquires companies and puts them under one of its six operating groups and gives them the freedom to operate. It facilitates them with management expertise and its vast network in return for a portion of recurring cash flows these firms generate.
Every new acquisition brings new customers, products, and cash flow streams. Some acquisitions fail, and some succeed. But Constellation’s net outcome is positive in the medium and long term. That explains why the stock grows consistently over the long term.
What is the long-term growth potential of the two stocks?
One place where Constellation lags is embracing the cloud and investing in AI, as mission-critical data is safer when not on the cloud. CSU will continue growing consistently. But BlackBerry is sitting on a treasure trove waiting to be unlocked.
BlackBerry is looking to tap the growing functional complexity and secure connectivity needs of vehicles. It is also eyeing the IoT proliferation from the 5G rollout. This stock could double your money in the short term.
Having both stocks can give your portfolio a better chance at growth.
