With apologies to Shopify fans, investors looking for home-grown technology sector success stories should be thinking about Constellation Software (Quote, Chart TSX:CSU) and OpenText Corp. (Quote, Chart TSX, NASDAQ:OTEX), two growth-by-acquisition software companies who have been richly rewarding shareholders over the past half-decade.
But how to choose between them? For starters, says Darren Sessions, partner and portfolio manager at Campbell lee & Ross Investment, CSU’s valuation is just too rich.
Constellation’s trajectory has been a sight to behold, having grown from $150 per share in mid-2013 to its current share price of $954. The stock even jumped above the $1,000 mark this May and reached an all-time high of $1,134 before taking a tumble in late July on the back of its latest earnings report.
Those second quarter financials featured a consensus miss on earnings per share at $5.75 versus the expected $6.78 along with a revenue topline of $752 million, a hair below the consensus expectation of $753 million. Investors also reacted to the company’s reported cash flow from operations which showed a year-over-year decrease of 13 per cent.
That slowdown in growth is an inevitability as the company gets bigger, says Sissons, who spoke to BNN Bloomberg recently.
“The core business is a tuck-in acquisition story of very small companies,” says Sissons. “The valuation now is at a level where the volume of acquisitions to move the needle are very, very sizeable. So they either do a larger acquisition or they do something else and if they do a larger acquisition, they’ll have to start paying for it, paying higher prices and that will change the underlying metrics of the business.”
“Historically, it’s been a very good story, it has done really well, but at these levels I find it very expensive,” he says.
Over the years, Constellation has acquired literally hundreds of small startups, but Sessions says there’s a notable lack of method to their acquisitions, especially when held up alongside Waterloo, Ontario’s OpenText, whose stock has risen 300 per cent since early 2013.
“OpenText does the acquisition/integration story just the same. It does it in niche verticals, three main verticals, whereas Constellation seems to be more of a hodgepodge of lots and lots of companies with no clearly discernible strategy,” he says.
Sessions also had words about Constellation’s recent decision to forego conference calls for its quarterly reports, opting instead for analysts and shareholders to submit online questions ahead of the release date. That smacks of extreme arrogance, says Sessions.
“I don’t like management’s attitude that we’re not going to talk to the Street. Having communication with your investors is fundamental and anyone who doesn’t do that, to me, that’s just not a good story,” he says.