The Constellation Software selloff is overdone, TD says

TD Cowen analyst David Kwan said on Sept. 25 that the recent sell-off in Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU) shares on concerns about the impact of artificial intelligence is “overdone” and reiterated a “Buy” rating with a $5,700.00 target, calling the stock one of his top picks.

The average target on the Street is $5,582.50.

On Sept. 24, Constellation’s Volaris Group hosted a “Redefining VMS in the AI Era” webinar, which Kwan said reinforced his view that the company remains focused on both the opportunities and risks of AI. That followed a rare Q&A session on Sept. 22 with founder and president Mark Leonard, intended to address investor concerns directly.

“Like the transition from on-premise to the cloud, we believe CSU is relatively well-positioned to address or mitigate another potential threat to its business and continue delivering strong returns for shareholders,” Kwan said.

He noted that panellists highlighted both productivity benefits, such as improved programming, deal creation and data analysis, and competitive risks as startups crowd into some verticals. Still, he said Constellation’s incumbency, customer relationships, proprietary data, and network effects leave it in a solid competitive position.

He added that the recent 20% pullback from Constellation’s pre-Q1 all-time high is “rare” for the company, recalling that its last comparable decline came in 2022 when the stock fell below $2,000 before more than doubling within three years.

The commentary came as Constellation also announced management changes. On Sept. 25 the company said founder Mark Leonard has stepped down as president for health reasons, effective immediately. Chief Operating Officer Mark Miller has been appointed president by the board of directors, while Leonard will remain on the board.

“On behalf of the Board and all of the employees of Constellation, I’d like to wish Mark a full and swift recovery,” John Billowits, Chairman of the Board, said in a release. “Since Mark’s original inception of Constellation in 1995, his visionary leadership, humility and wisdom have inspired countless Constellation leaders and employees to build what has become a truly exceptional global software company.”

Leonard, who owns a 1.9% stake in the company worth nearly US$1.21-billion, expressed confidence in his successor.

“Mark Miller has been a trusted adviser and a driving force within Constellation’s executive leadership team for over thirty years and I can think of no one more experienced, knowledgeable and capable to lead the company at this time,” he said.

Miller added: “Thankfully, Mark leaves Constellation exceptionally well-positioned to continue the trajectory of accomplishment and success we’ve experienced under his leadership. Working with our proven team of exceptional managers, capital allocators and employees, I’m confident we will have a seamless transition and deliver ever-increasing value to our shareholders and our customers.”

Year-to-date, Constellation shares are down 7% compared with a 13% gain for the S&P 500. Unless the share price rebounds, 2025 will mark only the second time since its 2006 IPO that Constellation has underperformed the broader market, and only the second time it has posted an annual decline.

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