Constellation Software vs. Shopify
They are two of, if not the two best performing Canadian technology stocks of this generation. Yet they have taken very different paths to their respective positions. Constellation Software, of course, led by the enigmatic Mark Leonard, has championed a growth-by-acquisition model that is noted for its extreme discipline. Shopify, on the other hand, might be the only Canadian tech characterized by its organic growth.
Analysts, however, still see upside in both stocks despite the tremendous returns they have already delivered. We break down the most recent analyst opinions about Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU) and Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP).
In May of this year, strong quarterly results had National Bank Financial analyst Richard Tse staying the course on Constellation Software. In a report where he reviewed CSU’s latest quarterly results, Tse maintained an “Outperform” rating and $3,000 target price on Constellation, saying the M&A market for this serial acquirer is looking great.
Tse called it another textbook quarter for CSU, one representing the ninth in a row of positive organic growth (in constant currency), something the analyst called impressive given Constellation’s highly diversified businesses with limited revenue synergies.
“We believe that will require larger deals like the recent (large) acquisitions of WideOrbit and Allscripts’ Healthcare Assets (renamed Altera) that have come with those lower hurdle rates allowing for the pursuit of those larger deals given the heightened level of competition. Notably, during Constellation’s Annual Shareholders Meeting (on May 8, 2023), management stated that it is increasingly being invited to the table for larger deals,” Tse wrote.
At the time of publication, Tse’s maintained $3,000 target on CSU represented a projected one-year return of 14.2 per cent.
14.2 per cent is not bad, but Tse thinks there is more upside to Shopify. In an August report following second quarter results, the analyst was bullish on SHOP.
Tse said SHOP has the pedal to the metal right now.
“Consistent with our preview, Shopify reported solid FQ2 results,” the analyst said. “That performance was driven by revenue growth of 31% Y/Y (+31% CC; +28% organic); significantly outpacing last year’s (FQ2’22) growth rate of 15.7% despite the higher revenue base. Notably, the Company returned to profitability with Adj. Operating Income of $146 mln, representing a 9% margin (+1,110 bps Q/Q; +1,223 bps Y/Y). With respect to the KPIs, they were equally solid, with take rate expanding 29 bps Y/Y, Shopify Plus represented 29.5% of MRR (-190 bps Y/Y), with continued strength internationally. We believe the Y/Y decline in Plus MRR as a percentage of total MRR reflects the mix care of the 33% price hike on lower-tiered subscription plans (i.e., non-Plus plans) in April.”
In a research update to clients on August 2, Tse maintained his “Outperform” rating and one-year price target of (US) $80.00 on Shopify, implying a return of 28.1 per cent at the time of publication.
“Bottom line,” said Tse, “Shopify continues to fortify its moat with new features like its upcoming AI offerings (starting with Sidekick assistant) while expanding into net new market opportunities like B2B. In addition, the Company is taking a more disciplined approach to capital allocation which has the potential to generate significant operating leverage moving forward. Finally, we believe the outlook appears conservative relative to our expectations. We reiterate our Outperform rating and US$80 target.”
One questions that arises about CSU is what happens when the field of potential acquisitions thins out? Well, we are not close to that happening if it ever does says an investor on the buy side.
Portfolio manager Barry Schwartz thinks CSU remains a hidden gem in the Canadian market.
“This is still, in our opinion, an undiscovered company in the sense that it’s only listed on the Canadian stock exchange [and thus] it’s too hard for non-Canadian investors to purchase,” said Schwartz, chief investment officer at Baskin Wealth Management, who spoke on BNN Bloomberg in March.
“There’s still a tremendous runway of growth,” he added. “[They have] a brilliant management team, and we look forward to many, many more acquisitions to come. I think they own about 650 companies and they’ve said they could acquire up to 100,000 companies in that kind of environment over the years.”
Schwartz says Constellation’s ability to keep delivering make it a good bet in today’s difficult market.
“It’s a really a safe harbour in a stormy environment,” he said. “Lots of cash flow being generated, and the software products that it sells through all these businesses people just don’t get rid of them unless they go bankrupt. Once you’re married to software for a long time, you’re stuck with it and it’s very hard to change,” he said.
Back to Shopify, where Roth Capital Partners says Shopify is a big company that ia growing the way a small one might.
In a quarterly preview in July, Roth Capital Partners analyst Darren Aftahi nudged up his target price on the stock while maintaining a “Buy” rating. The analyst said in the report that a survey of merchants on SHOP’s platform shows growth accelerating through the second quarter of the year.
With the update, Aftahi moved his target price on SHOP from $68 to $73, implying a one-year return at press time of 10.7 per cent.
“We expect SHOP to grow sales by over 25 per cent in 1H23, which places it at the high end of peers’ growth of 25 per cent. Those peers trade anywhere from 11-13x EV’23E sales. Our revised multiple of 13.4x EV/’23E sales reflects higher confidence in go-forward growth as well as an improving profit profile and picture. Our assumption is post 2Q23 results, our model will be revised upward,” he said.