Launching Coverage of Constellation Software With Narrow Moat Rating and CAD 2,110 FVE

We launch coverage of Constellation Software with a CAD 2,110 fair value estimate and narrow moat rating. The firm's business is akin to that of an investment company, with a specialization in asset-light, cash-generative vertical market software operators. Together, Constellation operates over 1,000 distinct software businesses in over 150 vertical markets globally, with no one business contributing materially to group earnings. We believe the firm enjoys high customer switching costs inherent in software and operates a remarkable M&A engine supported by brand assets and a vast proprietary database. However, at current prices, Constellation shares screen as highly overvalued on a risk-adjusted basis, trading at an eyewatering 76% premium to our valuation with a forward fiscal 2024 price to GAAP earnings ratio of 97 times.