Success breeds success, and Constellation Software (TSX:CSU) is a shining example. With total returns close to 1,800% over the past decade, no other large-cap TSX stock has matched its steady and consistent performance. Shares have risen from around $270 a share 10 years ago and reached $4,300 in August 2024. Given management’s continued execution success and the company’s demonstrated preference to avoid stock splits, Constellation Software’s stock price could climb even higher. But could investors see $10,000 on CSU stock in a decade?
A $10,000 CSU stock price target in 2034 implies a 132% gain in Constellation Software stock over the next decade, and that could be achievable if management doesn’t do a stock split.
Source: Getty Images
Constellation Software stock: Canada’s outperforming tech consolidator
Constellation Software acquires, manages, and builds vertical market software businesses. It acquires and grows mission-critical business lines every year, and thanks to its founder Mark Leonard’s private equity roots, the company has been very adept at identifying great businesses with wide defensible moats in the software market. It consistently demonstrates excellence in negotiating good takeover terms while growing from a $25 million startup into a $91 billion conglomerate.
The acquisitions-led growth model is working well for Constellation Software. It’s continuing to consolidate wide-moat software businesses with a sustainable capacity to generate positive cash flows. The company has used free cash flows generated from its portfolio businesses to buy new targets in a self-reinforcing strategy that could continue to work for a decade and beyond.
Strong earnings growth outlook
Constellation reported 21% year-over-year growth in second-quarter 2024 revenue to nearly US$2.5 billion, and its GAAP earnings per share surged 71% year-over-year to $8.4. Financial analysts are bullish on the business’ sustained growth given a 20% compound annual revenue growth estimate over the next two years, which could power a 54% earnings per share growth rate during the same period.
Even better, analysts’ long-term earnings growth estimate of 25.6% implies a strong profitability growth rate for CSU over the next five years. While a historical price-to-earnings (P/E) multiple above 100 on the stock speaks to the market’s enthusiasm about its growing profits justifying its steep valuation.
Can investors see a $10,000 price quote on CSU stock?
Speculating on a $10,000 stock price for Constellation Software isn’t that wild, especially given management’s track record, the business’s repeated acquisitions success rate since the company’s initial public offering in 2006, and the sustained free cash flow generation capacity its vertical, mission-critical businesses continue to possess in 2024.
If Constellation Software manages to match analyst estimates for a 25.6% earnings growth rate over the next five years, and it averages another 10% annual growth rate over another five years, and the exchange rate between the United States Dollar and the Canadian Unit ends at 1.30, the company’s earnings per share (EPS) could surge to an equivalent of $200 in 10 years. At that point, the tech stock will require a PE multiple of 50 to justify a $10k CSU stock price.
What could go wrong?
Many scenarios could play out. Earnings growth rates will vary year-over-year, and recessions may distort the growth path. Further, the thesis assumes investors will continue to value the stock highly 10 years from now, but a PE of 50 could be too high for a company that will be growing earnings at 10% per annum.
Moreover, investor concerns may be arising around future deal sizes. The number of small targets with high returns potential could continue to dwindle, and negotiating power may weaken as the company, its competitors, and richly funded private equity funds scramble for lucrative deals.
Ironically, Constellation Software’s competitors now include its recent spinoffs of Topicus.com and the Lumine Group, which may successfully replicate their former parent’s winning growth strategy.
Investor takeaway
It’s easy to happily speculate on the future if one’s bullish on an investment, but no one has a crystal ball. Constellation Software has demonstrated sustained revenue and earnings growth rates in the past, and we can speculate that the winning strategy will remain intact over the next decade. Given that background, CSU stock may double your investment, or do better over the long term. However, while scenarios may change, winners usually continue to win, and it may pay to buy and hold the large-cap growth stock in your core portfolio.
