The recent software downturn could mean more companies are willing to join Constellation at lower takeover prices.Timon Schneider / SOPA Images/Reuters
Is that a bell we just heard ringing? After global software stocks crumpled early this week over fresh concerns that they will all be eaten alive by artificial intelligence, bargain-loving contrarian investors may have noticed an encouraging signal.
Constellation Software Inc. CSU-T rallied from its lows.
Before the uptick, the stock was down as much as 58 per cent from its high, in May, largely over concerns that AI tools will chip away at the company’s expansive network of niche software companies.
These concerns have not disappeared.
Constellation isn’t alone here either. On Tuesday, a broad index of software stocks fell sharply after Anthropic, the San Francisco-based AI developer, announced new AI-driven tools for lawyers.
The S&P Software and Services Index fell 5.7 per cent, bringing the total downturn to 25 per cent since September, as investors extrapolated a worst-case scenario: OMG, AI is coming for everyone.
Salesforce Inc. has fallen 25 per cent this year alone, while Intuit Inc. is down 33 per cent and Atlassian Corp. is down 36 per cent.
Okay, as the saying goes, no one rings a bell when a downtrodden stock hits its lowest point.
But some bargain-hunters may have perked up over what looked like signs of capitulation – that moment when the last stubborn investor, who clung to software stocks on the way down, gives up.
In a ringing endorsement of this moment, Constellation’s share price rebounded on Wednesday. It is now 12 per cent above its intraday low, as of Thursday’s close, which is a curiously pronounced gain for a sector that is supposed to be facing oblivion.
One source of inspiration for the beaten-up stock may have come from Jensen Huang, the influential chief executive officer of Nvidia Corp., which makes the chips that power AI capabilities.
During a live chat on Tuesday, when the software selloff was in full swing, Mr. Huang told his audience that the stock market is suggesting that the software industry is in decline and will be replaced by AI.
But he disagreed with this notion: “It is the most illogical thing in the world,” he said.
Mr. Huang’s reasoning might not have been crystal clear to the general investor.
“If you were an artificial general intelligence, would you use the tools like ServiceNow and SAP and Cadence and Synopsys? Or would you reinvent a calculator?” he said, according to a transcript of the event.
But the takeaway was solid: The guy at the centre of the AI revolution thinks the software selloff is overdone.
For investors who have been watching Constellation’s gut-wrenching decline, Mr. Huang’s hot take was welcome.
Constellation is a special case among software stocks. It is a homegrown heavyweight with a knack for reinvesting cash flow into a large network of niche software companies, creating what fans believe is a compounding machine.
The stock’s long-term track record supports their case. Even with the downturn of the past eight months, Constellation has delivered a return of over 30 per cent a year over the past two decades, on average.
The thought of buying this superstar on the cheap is tantalizing.
One popular measure of valuation that compares the total value of the company to its operating performance – or enterprise value to estimated earnings before interest, taxes depreciation and amortization – suggests that the stock is significantly cheaper today than at any point over the past decade.
The current EV/EBITDA ratio is just 11.4, compared with a 10-year average of 19.5, according to S&P Global Market Intelligence.
The software sector’s glitch offers some advantages for Constellation.
The company relies upon a steady stream of niche acquisitions to keep its growth engine humming. The software downturn could mean that more companies are willing to join Constellation, and perhaps at lower takeover prices.
Stephanie Price, an analyst at CIBC Capital Markets, said as much in a research note a couple of weeks ago.
“We see the potential for Constellation to accelerate M&A” – mergers and acquisitions – “in fiscal 2026 given an attractive software valuation environment,” she said.
Snapping up Constellation shares is a brave move.
Analysts generally remain upbeat about the stock, suggesting that capitulation hasn’t reached Bay Street yet. Six of seven analysts who cover the stock have a “buy” recommendation on it, according to TD Securities.
Another worry: The broad software sector remains deep in the dumps, which implies that other companies haven’t followed Constellation’s lead.
But there’s hope here. If you’re fixated on buying a top-notch software company near its rock-bottom low, good news: The low may have passed.