🗞 Is AI Really Killing Constellation Software?

Happy Sunday! 👋 

Today we’re taking a look under the hood at one of the best performing stocks of the last two decades, Constellation Software.

Let’s dive in!

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Is AI Really Killing Constellation Software?

From July 2006 to May 2025, Constellation Software generated a cumulative return of 38,353% for shareholders. In other words, a $10,000 investment would have grown to $3.85 million in less than 20 years.

While those are among the best returns of any stock in the world over that timeframe, what is perhaps even more impressive, is that they were able to generate those returns without ever experiencing more than a 25% drawdown!

That was until last year.

Shares of Constellation Software are now down 48% from their 2025 highs, marking their largest drawdown ever.

The AI Threat

It doesn’t take much digging to discover why Constellation shares have struggled over the last year.

The rise of AI has left investors questioning the staying power of Constellation’s vertical market software portfolio. The concerns seem to be two-fold:

1) If tools like Claude or OpenAI Codex can empower even non-technical people to build their own systems cheaply, what’s stopping Constellation’s customers from cancelling their subscriptions and building their solutions themselves?

2) If AI is leading to such significant efficiencies that customers no longer need as many employees, will that put pressure on revenue growth for Constellation given the heavily seat-based pricing models?

Constellation Software AGM

Constellation Software held their annual shareholder meeting this Friday and management took plenty of time to address these exact concerns.

Here’s a photo our team got while in attendance:

During the Q&A session, President & CEO Mark Miller was quite clear in what he’s seeing (or rather not seeing) with regards to AI:

No customer attrition from AI whatsoever.

Constellation owns 1,500+ software businesses across more than 150 verticals, so that really is quite a statement.

When thinking about AI disruption risk for Constellation, it’s worth keeping in mind that, in general, their customers move pretty slowly. Most of them operate in highly regulated industries (healthcare, utilities, banking, etc.) where making even seemingly simple decisions like leveraging AI take a long time and often require long chains of approvals.

To help paint a picture of the exact types of customers that they serve, Constellation’s management team reminded investors that the vast majority of their revenue still comes from on-premise software licenses and maintenance fees, instead of cloud-hosted subscriptions.

What impact is AI really having?

At the annual meeting, several of the managers of Constellation’s individual operating groups spoke up on the impact they’re seeing from AI, and the messages were quite consistent.

So far, what customers are looking for hasn’t changed much. At the end of the day, whether it’s a city transit authority or a dentist’s office, Constellation’s customers are seeking solutions to specific problems, and often those needs have nothing to do with AI.

However, behind the scenes, AI is enabling Constellation’s companies to speed up the development process significantly and deliver new solutions/features to customers much quicker. While this does increase compute costs slightly, Constellation’s CFO Jamal Baksh stated that so far the impact is immaterial.

All in all, it appears AI is really having too meaningful of an impact on Constellation (either positively or negatively) aside from improving development times.

Capital Deployment

On the actual investment side, business seems to be heating up.

Last quarter, Constellation spent $689 million on acquisitions, marking their 2nd largest quarter ever of capital deployments. When asked about the elevated investments, CEO Mark Miller said it’s mostly business as usual despite the large selloffs in publicly traded software companies.

During the 1st quarter conference call, Constellation’s management team also noted that they made several larger acquisitions throughout Q2 as well.

Where does Constellation go from here?

Constellation hasn’t generated astounding returns because of some insane organic growth rate or having some profound technology that no one else can compete with. They’ve generated life changing returns because they’ve built a blueprint for finding and acquiring businesses at great prices. This has allowed them to generate returns on invested capital above 10% for more than two decades.

So far, very little has altered that formula for generating shareholder value. Constellation reportedly has 120,000 potential acquisition targets today (versus 1,500 owned businesses), and over the last 12 months, they’ve paid roughly 1.4x revenue for the businesses they’ve acquired, on average. That’s well within their historical valuation ranges.

With the pool for future deals as large as ever and AI having a muted impact (so far) on existing operations, it’s hard to see what’s stopping Constellation from continuing to please shareholders.

That’s all for this week. 

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