The Best Software Stock To Buy?

Added: 2026-05-23

[00:00:00]I've been seeing a lot of videos on ranking software stocks and I get asked all the time, what do you believe is the best software stock to be buying in this crazy market when all those software stocks are getting killed like they're producing little to no revenues and and I believe there's a massive overreaction in general and it's a very hard question to answer because it doesn't just depend on the mode or the business model, but it's also on how much we're paying for the business model. So maybe Adobe doesn't have the widest mode ever, but the price relative to what you're getting, I believe is a bargain and it could still work out and do amazingly amazingly well. So I'm going to talk about what I believe is likely the best software stock to be buying in this market. And I really hope you enjoy it as always. And I actually wrote about this stock like two weeks ago on Substack. I've been writing stuff for free by the way. Every two or three weeks I write about a stock for fun.

[00:00:54]I've been trying to improve my you could write up skills you could say and I wrote about it. I said the AI proof software stock that everyone is selling and I pretty much compared this period to 1999 to 2000 because back then investors believed that everyone would just stop uh shopping in person. They would all shop online. So a lot of the retail stocks they got killed. Dollar General or Dollar Tree, a lot of them got killed because people believe they were getting disrupted because the internet is the future and everyone will shop online. And that was actually 100% true. More people were shopping online.

[00:01:30]Internet and everything was the future.

[00:01:33]But Dollar General and Dollar Tree, a lot of those stocks, they've been compounding for the last 30 years, and they're still compounding till today.

[00:01:40]And some of them have even outperformed a lot of the tech hyped up stocks that didn't actually survive the 1999 2000 uh stock market crash. So generally speaking in the market we don't have equilibrium. We always take things to the extreme on the good side and on the bad side. And I believe the market is taking it to the extreme in terms of software in general. And I think there's a lot of bargains. Now my favorite one or I would say the stock that I would have picked which I believe is a popular stock is Service Now. I think Service Now has a massive edge in being an AI winner instead of being an AI loser. But my biggest problem with for Service Now and with software in general is stockbased compensation. Like if you look at the difference between GAP and nonGAAP for Service Now, there's a massive gap in between and this is mostly stockbased compensation expense.

[00:02:33]So, I'm not really a big fan of this structure in general, and this is one reason why I avoided those stocks. But there's one software stock that has no stockbased compensation, which I'm personally liking very, very much. And this stock is Constellation Software, ticker symbol CSU TO. The stock is down 46% over the last year. That was well known as one of the best compounders ever, up 15,000%. And it was a stock that pretty much never goes down. I mean, Constellation shareholders have never experienced, I think, more than a 20% drop since the stock went public.

[00:03:09]And as of late, it's down like 50% from the peak. It's been a massive massive uh draw down. Now, Costellation Software is what I would call a vertical market software, meaning they own like over 500 or 600 companies, and those companies, each of them is focused on niche markets. For example, they own a software company that runs the software for the municipality, let's say in Belgium. Then they have another one that's running specifically for schools in France. Then they have something else that's for utility company in in Idaho or something, you know. So there's like very missionritical software that's niche for a specific purpose and that makes them very very sticky because they are again mission critical. So if something happens to the software, if the software shuts down, the business can't really operate. School records would vanish. The utility companies would lose utility records. The municipalities could could lose tax record, could lose personal data and human data in general, you know, which is another reason why you can't just v code those apps because you're dealing with critical data in healthcare especially and especially in Europe and in other places where you have AI regulations which we don't have in the United States. So this is a massive edge that this company have. You have popular investors like Monish Pabry. He has 14% of his portfolio uh in Mark Leonard's complex which is constellation software topus and lumine. Then you have a popular quality investor Chuck Ari.

[00:04:37]Chuck Ari has 7% of his portfolio in constellation. And then he has about 4% in topus. He also owns Roer and then he bought more software. I believe he also bought FICO. He bought Salesforce. He bought service now. So he's clearly bullish on software in general and he believes software is undervalued and you even have the insiders they've been buying. This is a recent buy of a million dollars and one before that was about 350,000 mainly through an ownership plan. But even the insiders are buying and that's really amazing to me. Now if you look at constellation software they grew free cash flow per share at an average kagger of about 28%.

[00:05:17]from about a $148 in free cash flow per share to about $128 of free cash flow per share. Now, they did all of it since 2007 without issuing a single share. So, if you look at shares outstanding over here, they're pretty much still the same. And you look at free cash flow per share, it has increased a lot. This is an anomaly.

[00:05:39]This is something that doesn't normally happen in tech and in software where people get stockbased compensation for mopping the floor at Google. I mean, everyone's getting stockbased compensation nowadays. Well, the company doesn't do that. They care a lot about their shares. They have no stockbased compensation. Instead, they have a bonus program where if they hit certain growth metrics, they get a bonus and they have to invest 75% of this bonus into those shares on the open market and they have to hold them for four years to make sure that their incentives is aligned with the shareholders incentive. And I don't know any other company that's actually doing this. Most companies, they give them stockbased compensation for nothing. This one has no stockbased compensation. They don't dilute to do acquisitions, but they mainly focus on creating cash flow per share worth of value without pretty much little to no dilution. So that's one reason why I like this company very very much in the software space. But I also like it because of the CEO, the founder Mark Leonard. He's now has a lot of health issues. He stepped away and Mark Leonard was well known for like not taking his salary. Like the last seven years he he waved his salary. He doesn't want to get paid. He just wants to be the CEO and he cares about the company. Now you have Mark Miller which he's the new CEO. He has also waved his salary for 2026. He just doesn't want to get paid the salary. I don't know any other CEO that's waving his salary in 2026, especially with software and everything else. So again, you could see the culture here and this is something that uh you don't really find very often. Now in terms of AI disruption, I believe in most companies and it's the same seeing with constellation software is if the company is really getting disrupted, you should start to see it in organic growth. This company is focused on maintenance and recurring. This is what they focus on. They're not focused on licenses and hardware. They're focused on maintenance and recurring revenue.

[00:07:37]Now maintenance and recurring has been steady. 4% 6% 4% 6% 4%. Now, if we would have gone to 2%, 1%, 0%, negative or something, then you're like, okay, the company can no longer grow organically, they can no longer raise prices because they're being disrupted by AI. There's way more competition than before. So, you could tell the company's getting disrupted. Well, in the case of Constellation Software, I'm not seeing any signs of disruption. To them, it's like business as usual. And then they have topus. stop because it's actually reacelerating in organic growth. So both of those businesses are seeing no signs of disruption and if it's getting disrupted, you're going to see it first and the maintenance and recurring it should start to decline and potentially turn uh negative. Now the main question investors ask themselves is what is the mode? If you could create a software on cloud or chat GPT, what is the mode of a company like consolation software? Well, one of them which I believe still holds true till today despite the AI innovation, all of it is the high switching cost because they are deeply integrated in the customer's daily operations. For example, a utility company or a utility billing software may handle customers account meter readings, monthly bills, payment processing, shut offs, regulatory reporting, and historical usage of data.

[00:09:01]Switching to a new provider is risky because the utility would need to migrate years of data, retrain employees, test integrations, and avoid billing errors. Even a small mistake could lead to thousands of incorrect bills, angry customers, regulatory issues, or service disruption. So, you have to ask yourself if a company, if you have a software, let's say, and you want to switch away from it to something else, okay? and you make a mistake or if you're coding your own software and you make a mistake, a tiny mistake, what is the consequences of this mistake. So let's say for example you have a software that edits pictures, okay, and you're switching to another one. If you make a mistake while switching, is there such a big consequence? I don't think so. If you're utility company and you're switching, you have years of records and all these things and compliance and data of customers or a healthcare company or a government that deals with taxes. If you make a tiny error, I believe the cost is very very high. So this is why the switching cost is high and it's going to remain high despite AI because any tiny error could cause massive massive damage way way more costly than what the company can save by switching to an other AI company or by even vip coding their own software. Now the second mode you could say is the total cost of this software as a percentage of the company's budget. So the CEO they looked at the percentage of annual maintenance relative to the total budget meaning how much they're spending on constellation software the total was below 0.1% and that's even for customers with maintenance of over a million dollars a year. So in terms of a cost of budget for those companies the software is costing them 0.1% of the revenues. Now we ask ourself an important question which is that if they have this software, this software works. It handles critical data. It's 0.1% of the revenues. It has a high, you could say, consequence rate if something goes wrong. Is it really worth it to switch to another provider or to VIP code their own software to save 0.1% or in some cases less than 0.1% of their uh budget on this software? I personally don't think so. I think the customers care more about something that works versus trying to save every tiny bit of money. If the company constellation can make sure that that software works, then I don't see a reason for them to be switching away from it. So this is the company's mode in the AI era and the competitive advantage in general mainly the mission critical part. uh you could say the customer retention in general and the nature of the businesses that they own where if there's a tiny error in anything that happens in the software the cost could be detrimental to those companies to those municipalities and it could cost them much more it could cost them maybe 50 years of what they're paying consolation for the software so they baser not switching away from the company okay now in terms of a potential catalyst for the stock and I said it before I'm going to say it and is mainly if they can showcase that they're using AI for efficiencies within the company.

[00:12:17]So I've seen it with meta. Meta is showing efficiency. The market likes it sometimes when they show efficiency like they want to see that the company is somehow benefiting from AI and it's not being just disrupted by AI. Now the company's biggest expense is its staffing. So they make 3.1 billion in gross profit. They spend 1.7 billion on staffing on people like code and all these things. Now, if coding is going to become easier, it's going to become cheaper, I believe Constellation can save a lot of money on staffing. Now, if they can grow revenues 20% like they've been doing through acquisitions and organic, and they can grow staff expense by 5% instead of 15 or 20%. I think that would shows the market that, oh, they actually retain those customers. They can still raise prices and they can use AI to save on labor and to save on coding in general and on new projects in general. So that could turn the sentiment from an AI loser to an AI winner and it could happen overnight.

[00:13:10]The company is investing in this technology and we don't know exactly when that's going to uh pay off. Now in terms of my valuation model on the stock, I use their own metric of free cash flow available to shareholders which is their favorite metric and I use the worst case scenario, best case scenario and best case scenario. Okay.

[00:13:29]Now, the worst case scenario is 15% growth in free cash available to shareholders and it trades at 15 times.

[00:13:35]Like this is like the worst ever case scenario. It has never happened. I don't think it's going to happen. That would be like a 5% annual return, but that's like the worst case ever. Now, the base case, which I think it's much much more likely, and I actually would put it kind of as the worst case, is 20% free cash available to shareholders of growth. The company has grown more than 30%, they can do 20%. and it trades at 20 times free cash flow available to shareholders. In this case, I see a 16% annual return. Best case is 24% gross like they did before and it trades at 24 times. I got a 24% annual return. Now, many people don't know that constellation used to trade at 40 to 50 times free cash flow available to shareholders and it was growing free cash available to shareholders by about 25 to 40% throughout this years. So I'm pricing in more than a 50% multiple contraction on the best case scenario and I could still see up to a 24% annual return. So I believe constellation software is undervalued. It's one of my favorites in the software space as a bet on AI in general and maybe it's not going to be the biggest AI beneficiaries but in terms of standing disruption against AI in terms of a culture that I trust that I look up to I think it's one of the best. I would put Service Now and Constellation as potentially the best, you could say, soft related stocks to buy in this market. And that was my opinion on Constellation. Hope you enjoyed it. It was not financial advice.

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