Constellation Software (CSU)

Constellation Software reported very good earnings today. As you may know, the company’s stock has not been immune to the _SaaSpocalypse_ narrative, but investors’ fears should’ve been calmed a bit post-earnings. For several reasons…

1. There’s no noticeable impact of AI in the numbers yet

2. Management provided interesting (albeit qualitative and subjective) comments as to what they expect the AI impact to be

3. AI fears have actually enlarged Constellation’s capital deployment opportunity

[...]

All in all, the financials don’t seem to portray that this is a dying business, but in all fairness to the skeptics, the AI threat “promises” to be a long-term threat in nature rather than one of immediate disruption. FCFA2S excluding the IRGA was $2.12 billion in 2025. At Constellation’s current EV of $46 billion, the company is trading at an EV/FCF yield of 4.6% while growing cash flows above mid-teens and potentially accelerating capital deployment.

[...]

But wait, there is more good news: Constellation’s capital deployment pipeline is becoming larger. This stems from a new strategy that the company will pursue named PMS: Permanent-Engaged Minority Shareholder.Sabre (SABR) was just the beginning of what might become a more prevalent strategy going forward

[...]

Management was evidently asked about their thoughts on the AI threat. Even though they did not outright provide thoughts about the implications of AI in setting terminal values, I believe that the PMS strategy sort of confirms their view on the AI impact on VMS (i.e., the market might have gone too far in some cases).