IS NOW THE TIME TO BUY?

Can a model built on the acquisition of thousands of small, niche software businesses survive an era where AI promises to commoditize code and the leader has recently changed?

The legendary Mark Leonard has stepped down, and the market is nervous. But if you look closer, Constellation Software (TSX: CSU) isn’t just a person, it’s an institutionalized capital allocation machine. With new President Mark Miller at the helm (a 30-year veteran who helped build the model from day one), the company’s decentralized engine is primed to continue its «business as usual» trajectory of high-volume, niche acquisitions.

While skeptics fear AI will commoditize code, they miss the nature of Vertical Market Software (VMS). These systems aren’t just tools, they are the mission-critical backbones of hospitals, utilities, and transit networks where switching costs are astronomical and data gravity is absolute. By adopting a disciplined «fast follower» approach, Constellation is integrating AI tools like «Smart Edit» to enhance customer value, proving that domain expertise remains the ultimate moat in the LLM era.

The financial engine remains a masterclass in efficiency. Over the past decade, revenue has compounded at a 22% CAGR, fueled by an acquisition flywheel that targets thousands of fragmented niche providers globally. Because CSU utilizes a negative cash conversion cycle, effectively collecting maintenance fees in advance, it funds its billion-dollar M&A pipeline without diluting shareholders or relying on excessive leverage.

We are currently seeing a rare valuation reset. Trading at approximately C$2,357, the stock has retreated 55% from its 2025 highs, pushing its free cash flow yield to levels not seen in nearly a decade. For a company generating C$2.6 billion in LTM FCF with a fortress balance sheet (0.8x Net Debt/EBITDA), this sentiment driven drawdown could offer a compelling entry point for long-term compounders.

A price target of C$3,650 represents a potential 55% upside, anchored in a reality where software durability beats temporary hype, so far. As the company heads toward its March 10th conference call, the focus remains on execution over narrative. In 2026, the «Architecture of Permanence» is not just intact, it could be significantly undervalued.

For more details, read our Analysis on Constellation Software in the following link:

Constellation Software (TSX: CSU) Initiation Coverage Report

Disclaimer:

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