Ayalon (4D) Global Stocks, managed by Ayalon Trust Funds Ltd. on Constellation Software Inc.
Thesis
Constellation Software is a serial acquirer of niche vertical-software businesses with a long record of strong earnings growth and capital allocation. The shares fell more than 50 percent from their peak after founder Mark Leonard retired for health reasons and investors grew concerned that AI could make parts of the software portfolio less relevant. The manager believes many subsidiaries provide mission-critical systems for hospitals, municipalities and other essential services that will continue to require established software even as AI alternatives improve. He also expects the software downturn to create cheaper acquisition opportunities for Constellation and believes the company can expand into areas less exposed to AI disruption. With the valuation already reflecting much of the perceived risk, the fund continues to recommend the shares.
“I recommend purchasing the company's stock at its current valuation, which already embodies the risk”
Key risks
- AI could disrupt or commoditize software provided by some subsidiaries
- Founder Mark Leonard retired and leadership execution must continue under his successor
- The acquisition strategy may not offset pressure on existing software businesses