Wiring inside a Microsoft data centre in Mount Pleasant, Wis. Developments in artificial intelligence may be a cause for concern among investors in Constellation Software Inc.Audrey Richardson/Reuters
Constellation Software Inc.’s CSU-T share price has been stumbling over the past few months, possibly because investors are getting worried that artificial intelligence poses a threat to the holding company’s sprawling collection of businesses.
But are the handwringers overreacting?
The share price has declined nearly 17 per cent from its recent high in early May, as of Thursday, pushing it underwater for the year.
That’s a rare setback for a standout that has delivered an average annual return of nearly 35 per cent since its initial public offering in 2006.
Constellation is hosting a webcast on Monday, after one of its largest shareholders asked for a question-and-answer session to address the potential impact of AI on its companies.
“AI has created uncertainty for our employees, shareholders and customers,” Mark Leonard, president and founder of Constellation Software, said in the company’s webcast invitation this week.
“We felt that the discussion would inevitably turn from the general to the CSI-specific, so we suggested a webcast where all shareholders would be able to pose questions,” he added.
The stock has faced only four significant dips of 20 per cent or more over the past decade, all of them short-lived. That implies a high level of confidence in Constellation’s business model of assembling a global empire of small software companies, with the cash generated from its existing holdings.
Investors are clearly rattled, though.
The first stage of the current downturn began in May, after Constellation reported a slower-than-expected pace of acquisitions, raising concerns that the holding company is seeing fewer good opportunities for growth this year.
With acquisitions picking up since then, AI has become the bigger concern.
AI technologies have been a boon for chip-makers such as Nvidia Corp. NVDA-Q, tech behemoths including Meta Platforms Inc. META-Q, and even utilities that feed power-hungry data centres. Some observers believe that AI will usher in the next industrial revolution.
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However, there may be a downside for some software firms.
Sophisticated AI tools could be disruptive if customers use them to develop their own internal software. Or such tools could lower barriers to entry, encouraging rival software firms to develop competitive products and turn a cozy sector into something far more cutthroat.
The bullish hope depends on whether investors will emerge from the session with renewed faith in the company’s ability to navigate the uncertainty with a diversified network of niche software and entrenched customer relationships that aren’t easily pushed aside.
Thanos Moschopoulos, an analyst at BMO Capital Markets, rattled off a few of the more specific business lines that Constellation has nurtured: software to manage cruise ships, school libraries and, one of his favourite examples, fence-builders.
“The smaller size of the addressable market opportunity makes many of these less attractive to new entrants. And there is a competitive moat associated with having deep industry expertise,” Mr. Moschopoulos said in an interview.
Software developers need to have a thorough understanding of what a customer expects, how they will interact with the software and how it will function with other programs and systems.
Yes, AI can help with generating code, he said. “But that’s not enough to have a competitive offering.”
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Constellation owns over 2,000 businesses across hundreds of distinct industries, such as the aforementioned fence-building. So even if AI does emerge as a disruptive threat, it is unlikely to affect all of the company’s businesses in the same way and at the same time.
There is even a potential upside here. AI can help the holding company’s own research and development efforts. And if independent software developers grow nervous about the threat from AI, Constellation could find additional buying opportunities.
That doesn’t make the company bulletproof. But after the stock’s sell-off over the past four months, that may not matter much.
Using a valuation measure that compares a company’s total value to its estimated EBITDA (or earnings before interest, taxes, depreciation and amortization) – an approach favoured by analysts covering Constellation – the stock is looking attractive.
The valuation is now in line with its 10-year average, according to data from S&P Global Market Intelligence, which suggests that at least some of the potential risks from AI are priced in.
If these risks subside, which investors may learn more about after the company’s Q&A on Monday, then the dip might not last much longer.
As any long-term investor will tell you, the reward for holding this stock through occasional downturns – and tuning out fears about the company’s growth prospects – has paid off in a big way.