Constellation Software: Lets look at the actual businesses they own

AI Summary

Bullish deep-dive on Constellation Software arguing the 45% drawdown is an AI-narrative-driven buying opportunity with shares far below the author's estimated intrinsic value.

CSU.TO — LONG The author argues Constellation Software is deeply undervalued after a 45% drawdown, estimating intrinsic value at CAD 4,500-6,000 per share versus a recent CAD 2,845 price. He cites a 2027 estimated FCF yield above 8% and roughly 15% IRR at the current valuation as the basis for a long position. The main risk he acknowledges is that the market may keep applying an AI-disruption discount.

From my back of the napkin math, I believe the rough intrinsic value of each CSI share lands between $4,500-6,000 CAD, and it just closed at $2,845 CAD. The 2027 FCF yield based on estimates at the current valuation is 8%+ now and IRR at current valuation is about 15%.

CSU.TO — LONG The author argues the bear case that AI can easily replicate CSI's legacy software is wrong because its vertical market software is built on decades of customization, client relationships and niche industry workflows. He says these systems have survived mainframe-to-PC-to-web-to-cloud transitions and AI is only a minor weather event, so the AI-disruption discount should fade. The stated risk is that AI could still increase competition and pressure margins.

These legacy systems are basically bulletproof. They have survived the move from Mainframes to PC, PC to Web, and Web to Cloud. AI is just a minor weather event.

CSU.TO — LONG The author contends that AI cannot disrupt CSI because writing code is useless without proprietary data, systems of record and industry experience. He also points to high retraining, integration and operational switching costs, and notes software is below 1% of customer revenue, giving little incentive to migrate to unproven AI replacements. The stated risk is that AI could eventually lower switching costs or enable new entrants.

Sure, application softwares can be quickly written and made with some form of AI and tasks can be automated - but the code is meaningless or flat out impossible to write no matter how advanced AI is if there is no data or systems of records to go off of.

CSU.TO — LONG The author argues CSI is not an AI victim but a fast follower that already implements AI across portfolio companies and owns businesses that create mission-critical software. He claims this positions CSI to benefit from AI rather than be disrupted, supporting the long thesis. The stated risk is that the market may continue to ignore this and apply an AI threat discount.

CSI is not a slow innovator, as stated in the AI conference call, they are a fast follower. They already have AI enabled in their software in many of their businesses that can benefit from it.

CSU.TO — LONG The author says CSI's M&A pipeline remains intact and AI can help source or create acquisitions, supporting future growth. He argues this reinforces the long case because CSI's acquisition strategy continues despite the AI narrative. No specific risk for this point is stated beyond the overall AI-disruption concern.

The M&A pipeline remains intact, and AI can actually help with finding acquisitions or creating companies to acquire.

CSU.TO — LONG The author believes the management change deserves only a minor drawdown, not the 45% decline, because Mark Leonard remains on the board and CSI has a deep bench of long-tenured leaders. He contrasts the selloff with Berkshire's smaller drawdown after Buffett's departure. The stated risk is uncertainty over how long Mark Miller will stay at the helm.

A final note, regarding the management change - I truthfully think this is the one thing that does deserve a minor drawdown of the stock, but not 45%.

CSU.TO — LONG The author cites Mark Miller's CAD 5 million open-market purchase of CSU in December as evidence that the management change selloff is overdone. This insider buying signal supports his long thesis and suggests management sees value at current prices. The stated risk is that the market may remain focused on the CEO transition.

Mark Miller recently made an open market purchase of 5M CAD of CSU back in December.

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Constellation Software (CSI) already represents about 50% of my portfolio (approximately 100 $CNSWF shares) and I believe the recent 45% drawdown from the peak has absolutely no attachment to the fundamentals of the business. Monish Pabrai says that when you see an investment that feels like you're getting hit with a 2x4 - you go all in. Or, as Warren Buffett likes to say, wait for the fat pitch. It certainly does feel like I'm getting hit by a 2x4, and I believe this is the fat pitch. At current valuations, I believe CSI is a heads I win, tails I don't lose too much proposition (another Pabrai quote). From my back of the napkin math, I believe the rough intrinsic value of each CSI share lands between $4,500-6,000 CAD, and it just closed at $2,845 CAD. The 2027 FCF yield based on estimates at the current valuation is 8%+ now and IRR at current valuation is about 15%. I'm highly considering trimming my hot Comfort Systems USA AI stock that's up 225% since last April priced for perfection for more CSI at this rate.

CSI has seemingly been thrown into the bucket with other non-related horizontal market softwares that investors also believe are threatened by artificial intelligence and heavily sold off. The main bear narrative for CSI specifically is the belief that CSI holds a bunch of old shoddy legacy softwares and that can easily be replicated and improved by artificial intelligence, pressuring margins and increasing competition. 

I cannot speak for horizontal softwares such as Adobe or ServiceNow as I haven’t done any extensive research on these, but I believe that CSI is not only well insulated from any possible AI threat with their unique collection of vertical softwares but may actually thrive from this new technology for several reasons. I'll get into why I believe CSI will not only come out from this drawdown but may have AI be a tailwind.

At its core, CSI is a capital allocator. They have found over the last two decades that their best method of producing high rates of return has been through acquiring vertical market softwares, targeting niche small businesses servicing a very small specific industry, providing a software platform for their specific needs. 

***What’s most amusing but also insightful is that you can ignore the analyst predictions, ignore delving deep in the financial statements, reading 10Ks, listening to the AGMs - all you need to do is simply spend an hour (or 15 like me) clicking through and looking at the companies CSI owns, and I mean literally click through the websites, click through the tabs, read their content, read their service - and you will be already convinced as to why this AI threat narrative is nearly nonexistent for CSI*.**

**1. CSI’s SaaS is built on years or decades of customization, fine tuning and client relationships.**

The first thing that immediately stood out to me when I began my research looking through CSI’s companies is that I noticed the majority of them began in the 1970s through the 1990s. Remember when I said investors believe that CSI holds a bunch of old shoddy legacy softwares and that can easily be replicated and improved by artificial intelligence?

Please welcome Cactus Utilities AB. 

A company that began in 1974 acquired by CSI in 2022, still used today by water treatment facilities in Sweden to digitize their operations. Here is an excerpt taken straight from their website:

“The core of Cactus's operations is the management and development of the proprietary SCADA system Cactus Eye (hereinafter CE), which is based on a server-client solution with an SQL database for historical storage. As a SCADA system, CE is distinguished in that it is mainly developed for Swedish water and wastewater operations, which are often spread over large geographical areas. CE is thus particularly well adapted to handle very large numbers of substations (PLCs) with all that this entails.

The architecture of CE builds on well-proven experiences and working methods from Cactus' previous SCADA systems, CSX and Uni-View, the first installations of which were made in the 80s. The CE we have today is thus the result of decades of close collaboration between Cactus' development department and the everyday lives of the customers' operators/operations technicians. The fact that the development of CE has always been driven by the motto "the user in focus" is something that has become widely known in VA-Sweden and is reflected not least in the great appreciation the system has received for its excellent user-friendliness.”

Now tell me after reading this, is AI writing code or automating tasks a threat to this business? These legacy systems are basically bulletproof. They have survived the move from Mainframes to PC, PC to Web, and Web to Cloud. AI is just a minor weather event. CSI owns hundreds and hundreds of basically what are these Cactus-type businesses each in their own industry niche. 

**2. Writing or automating software code or tasks is meaningless without data, systems of records and industry experience.**

Sure, application softwares can be quickly written and made with some form of AI and tasks can be automated - but the code is meaningless or flat out impossible to write no matter how advanced AI is if there is no data or systems of records to go off of. When CSI makes an acquisition, they don’t just buy the software code, they buy the records and data. A competitor can't just plug in AI and start working; they would need to convince a municipality, a court, a legal team or a transit agency to migrate 40 years of sensitive, regulated data to an unproven startup or application. Where are they also going to get all the industry experience from? 

Two such examples, Tibute, Inc. and GeoSoftware. 

Founded in 1991 and acquired by CSI in 2020, Tribute provides ERP business management software for industrial distributors that offer fabrication and system integration services. Here in some excerpts from their website: 

“Tribute’s industry-leading software, TrulinX, helps motion control and fluid power distributors & fabricators stay competitive with a business management software that will streamline processes, reduce costs, save time, and improve customer service.

What makes TrulinX special is that you are getting more than an industry-leading industrial distribution software, you are gaining a partner with over 40 years of industry experience. Tribute will work as a strategic partner to help your fluid power and motion control distribution & fabrication business run smoother.”

What can AI do to threaten 40 years of niche industry experience? Probably not much. How about GeoSoftware?

* Reduce exploration risks with advanced geophysical interpretation and analysis software.
* Optimize field appraisal and development with reservoir characterization technology.
* Locate and evaluate zones in wellbores and quantify commercial potential with petrophysical software.
* Easily complete comprehensive interpretations and quickly see complex faulting, fracturing, and the true paleo-depositional environment with 3D interpretation solutions.
* Partner with GeoSoftware and utilize our team of geoscience experts around the world who specialize in E&P workflows in any reservoir.

Doesn’t seem to me that AI will be touching this one anytime soon either. 

**3. CSI isn’t software, it’s a trusted industry experienced team.**

Just hear me out on this one. Will a business want to rip out a 5, 10, 15 or even 20 year old software provider that has proven reputable support teams for their specific business or industry to be replaced by a new artificial intelligence coded application with a relatively unknown support team? Businesses want trusted partners with industry experience, not just automation and fancy software features. 

**4. If AI makes and creates software that runs faster, better, and more efficient - why can’t CSI implement it too?**

The narrative of artificial intelligence eating software also just doesn't make sense to me for a simple reason - *CSI can do it too*. In fact, *CSI already has*. Harking back to my main point, just look at the businesses. AI is already implemented everywhere. **CSI even owns businesses to create mission critical software. In other words, *they literally already own the exact businesses that investors believe are a threat.***

4D SAS: 4D SAS offers two hybrid low-code development platforms (4D and Qodly) that enable the rapid creation and deployment of mission-critical business applications, whether on-premises or in the cloud. “4D 21LTS is here. Your AI engine is roaring.” 

Servoy: Build Mission Critical Applications. Fast. 

Site Service Software: Revolutionizing Elevator Service with Intelligent Solutions. (There’s literally AI everywhere on this website, for an elevator servicing software, go figure).

AskCody.com: An AI enabled meeting management platform. 

Neural Technologies: “Our central mission revolves around empowering enterprises to safeguard and augment their financial health using our sophisticated suite of solutions powered by AI and machine learning. By delving deep into the unique challenges each customer faces, we craft tailor-made solutions, ensuring that every interaction not only addresses immediate concerns but also anticipates future needs. Our commitment is to truly understand and serve, making every solution resonate with the intricacies of each customer's aspirations.”

I mean, you can’t make this up - it’s literally on their websites. CSI is not a slow innovator, as stated in the AI conference call, they are a fast follower. They already have AI enabled in their software in many of their businesses that can benefit from it. 

**5. Many CSI applications require real, physical hardware.**

We all love the library software that gets touted by CSI investors. Seems easy for AI to handle, right? Oh wait, what about the…

* Lyngsoe Sort Mate™ 2000 Module
* Lyngsoe Ergo Box™
* Lyngsoe Ergo Cart™
* Lyngsoe Ergo Volume™
* Lyngsoe Ergo Staff™ 1200
* Lyngsoe Ergo Trolley™
* Lyngsoe Library Mate™ 1200 Self-return Kiosk
* Lyngsoe Library Mate™ 2100 Exterior Kiosk
* Lyngsoe Turn Mate™

Yeah. CSI’s Envisionware also offers the physical book handling machines. Tough luck, AI. 

**The software cost as an expense of total revenue of the business is <1%.**

Most CSI investors have heard this one before so I’ll keep it brief. I believe I heard somewhere it’s as low as 0.03%. The argument could be made that if AI can easily create competition, pricing power and margins would decline. But why would a business switch and go through all this hassle just to save a few bucks a year? It doesn't make sense, leading to the next point below. 

**6. Switching is hard.**

Say for whatever reason a business decides to embark on the perilous journey of switching software providers to something more…AI. Now the business has to deal with retraining employees and overriding years or decades of muscle memory, reintegrating the software into all the devices and equipment (anything from computers to phones to tablets to machinery on a manufacturing floor), dealing with debugging issues, and largely creating significant operational slowdown that may at best cause the AI benefits to be a wash or more likely worse productivity and efficiency outcomes. 

From this study done by Joel Becker, Nate Rush, Beth Barnes, David Rein titled Measuring the Impact of Early-2025 AI on Experienced Open-Source Developer Productivity, granted, with agents at the time that aren’t the current models, but perhaps the conclusion still stands: “developers estimate that allowing AI reduced completion time by 20%. Surprisingly, we find that allowing AI actually increases completion time by 19%—AI tooling slowed developers down.”

**7. The M&A pipeline remains intact, and AI can actually help with finding acquisitions or creating companies to acquire.**

**8. In their strict hurdle criteria, CSI is already discounting the future of their acquisitions, a lot.** 
	
That came from Mark Leonard by the way, not me. Essentially, CSI carefully looks at all possible scenarios, and even factors in the possibility in their discount rate of a total wipeout. Basically, an AI disaster would already be priced in.

**9. Many of the businesses that CSI deals with are actually slow implementors, and CSI is the first to make optimizations (AI or not) based on the data they collect.** 

Utility, transit, construction and government businesses do not quickly adapt, in fact, usually are years behind. CSI stated that they are the ones pushing innovation. OpenAI’s new model or the next version of Gemini will not touch any of these businesses for years and years. 

**10. To summarize, it seems to me, the ones who stand to benefit most from AI SaaS implementation are those who already have built and worked with the ground level surface data, have the systems of record, have the client relationships, have decades of industry experience and have the reputation. You can't AI that.** 

A final note, regarding the management change - I truthfully think this is the one thing that does deserve a minor drawdown of the stock, but not 45%. Berkshire has only dipped about 8% since Buffet's departure. Mark Leonard is still on the board and from hearing some statements from analysts, apparently he is recovering well, though this is unconfirmed. I don't know how long Mark Miller intends to stay at the helm, but CSI still has a deep bench of leaders that have been at the company for decades. 

TLDR;

Just browse the businesses they own and this AI threat just falls apart. 

The 45% drawdown in CSI is a massive opportunity caused by a misunderstood AI narrative that ignores the reality of VMS. CSI’s moats aren't just code; they are built on decades of proprietary data, systems of record, industry leaders and support teams with multi-decade industry relationships and experience that a LLM or agent simply cannot replicate or "disrupt". With a current price of ~$2,850 CAD against what I believe is an estimated intrinsic value of $4,500-6,000+, the stock is trading at the highest discount in decades, despite the fact that CSI is already a fast follower implementing AI across its own portfolio. CSI even owns businesses to help create mission critical software, they literally already own the exact businesses that investors believe are a threat. Mark Miller recently made an open market purchase of 5M CAD of CSU back in December. The market is pricing in a death by AI - so here's your fat pitch.

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