Investors in Canada often seek out tech stocks for their rapid growth potential, especially when the market conditions are right. While several tech stocks in Canada have offered decent long-term growth and not just temporary positive spikes, almost none are on par with Constellation Software (TSX:CSU) regarding the combination of growth pace and consistency.
However, does a stellar track record, a solid business model, and an impressive portfolio of underlying businesses really make it a no-brainer buy?
The case for Constellation Software being a no-brainer buy
In 2006, Constellation Software was trading below $20 a share. Less than two decades later, the same stock has the highest price tag on the TSX at $3,638 per share. That’s over 19,000% growth in less than 20 years. Annualized, that’s a growth of more than 1,000% each year, which is almost unprecedented.
While the growth pace has slowed down in recent years and has reached more realistic levels — i.e., 211% in the last five years, the numbers are still impressive, even for a growth stock from the tech sector. The slower growth is an endorsement that the stock might be trading or is ready to trade at a more realistic level.
Its ownership structure is another variable in the company’s favour. Only about 50% of the company is owned by public investors. A huge chunk is owned by insiders (6.7%), and institutions own about 42.7% of the company.
Then there is the company’s reach. It has six diversified tech businesses in its portfolio that, in turn, have over a hundred tech companies in their collective portfolio from across the world. Constellation and the companies under its umbrella mainly serve vertical markets with their software needs.
Reasons to be cautious
While Constellation’s growth has been uniquely stable, there are still reasons to be cautious. The first reason is that despite healthy financials, the company’s valuation is quite inflated, as evident from the price-to-earnings ratio of 100. The price is another problem.
It’s already the most expensive stock in the country, and if it continues this way, it may reach a five-digit price tag. From the perspective of its current price, it would take the stock less than 200% to reach $10,000 a share.
That’s less than how much the stock traded in the last five years. The problem is that even if the stock isn’t inflated or bloated, it definitely seems so, which may not be good from a market sentiment perspective. One bad news or significant concern associated with the company might trigger a selloff spree.
Foolish takeaway
Constellation Software might be considered a no-brainer buy, but I recommend taking its shortcomings into account. The growth potential may not remain as impressive in the future as it was in the past, but if it slumps, the decline might be disproportionately higher than the growth potential.
