In the Canadian technology space, Constellation Software (TSX:CSU) is a company which has had an incredible run for investors. The outstanding question for many is whether or not this share price appreciation can be expected to continue.
Constellation Software is currently a darling in the tech sector, perhaps driven to these valuations in part due to the fact that there aren’t too many high-quality tech names to choose from in Canada. This is a major concern for conservative long-term investors like myself, who struggle to find the link between the current valuation of the company and the inherent risks related to the company, the tech sector, and the market as a whole.
Any time a company appreciates approximately 280% over a five-year span, or 150% over a three-year span, investors need to ask questions about how these valuation increases relate to such a company’s bottom line.
The overarching argument for Constellation Software outperforming over the long-term is an extremely skilled and talented management team with a proven track record of acquisitions continuing to acquire companies within its pipeline. This strategy can be a dangerous one, as it requires higher levels of debt or share dilution over time, and requires the company’s management team to really execute on its promises.
Should the earnings of companies acquired by Constellation continue to accelerate, a continued uptrend in the company’s stock price could be possible, but this stock is just too risky for me right now, given the company’s underlying acquisition-based business model.
Invest wisely, my friends.
