It used to be that Constellation Software could do no wrong. Now it can do no right.
The parent and its offspring took a serious beating. Constellation’s stock is down 30%, Topicus’ 35%, Lumine’s 45%. All in just two months. The myth of the flawless compounding machines caught some lead in the wings.
Why? Mark Leonard stepped down for health reasons, and artificial intelligence — of course — is coming for everything. Including the software business. Or so the story goes.
Color me unconcerned. The matrix Leonard designed was made to outlive him. I’d worry less about Constellation without Mark Leonard than Berkshire without Warren Buffett. Topicus — and before it, its core engine Total Specific Solutions — proved that years ago.
As for AI, it still needs hands, heads, and smarts. Rollout, training, maintenance, security — none of it runs itself. So the plumber shouldn’t fear the new wrench. If anything, it should be a gift to the niche, entrenched, mission-critical businesses these companies run.
I’ve owned Topicus since mid-2022. Bought around €70 a share on a simple premise: grow 20% a year, earn 20% profit margins — lower than Constellation when it was at a comparable scale.
That’s €767 million in pre-acquisition free cash flow by 2030, or €5.9 per share — roughly C$8.9 at the historical EUR/CAD rate. Slap a x20 multiple on it, and you get C$178. Bought at C$70, that’s about 12.4% a year. Not shabby.
I thought the model was optimistic. Turns out they’ve been beating it. But they’ve really been firing on all cylinders. If you look at the windshield, revenue is up fourfold in eight years, free cash flow fivefold.
If that continues, buying Topicus at $130 today gets you roughly 37% by 2030, or a 6.5% CAGR. Nothing to write home about. Unless they keep that growth on steroids. Which they very well might.
Lumine’s the same story, with revenue up fivefold in six years. Same math — 20% growth, 20% margins, x20 multiple — yields C$2.2 in free cash flow per share by 2030 using the historical USD/CAD rate. That’s C$44 of value against a C$29 price, or an 8.7% annual return.
Not fireworks, but I’ve seen worse — and bought some. Then again, Constellation was never a bargain. The market kept figuring it out too late.