Constellation Software or Shopify Stock?

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Written by Jed Lloren at The Motley Fool Canada

Many investors decide to hold tech stocks in their portfolio. This is a common strategy, because those kinds of stocks tend to offer investors amazing growth potential. However, it’s a very risky way to enter the stock market. It’s imperative that investors focus on well-established companies. Fortunately, there are lots of great Canadian tech stocks that investors can choose from.

In this article, I’ll discuss which may be the better buy between Constellation Software (TSX:CSU) and Shopify (TSX:SHOP) stock.

Background on these two companies

Constellation Software is the first stock that I’ll touch on today. For those who are unfamiliar, this company acquires vertical market software (VMS) businesses. For most of its history, Constellation Software has focused on small- and medium-sized VMS businesses. However, the company noticed that there have been fewer opportunities for Constellation Software to continue growing if it is stuck to that business model.

In 2021, Constellation Software’s president and founder Mark Leonard announced that the company would finally start targeting large VMS businesses for acquisition. Because of the sheer size of those acquisitions, a full-on cash acquisition is unlikely. Therefore, Constellation Software will start turning to spinoffs more often. It’ll take a while to see how the company incorporates this new growth avenue into its strategy, but things look promising, as we’ll see later on.

However, Shopify is a global leader within the e-commerce space. It provides a platform and many of the tools necessary for merchants to operate online stores. What makes Shopify stand out among its peers is the inclusivity of its offerings. Shopify is capable of catering to everyone from the first-time entrepreneur operating in the basement of their home to large-cap enterprises like Netflix.

Which one has performed better recently?

Year to date, there’s a clear winner between these two stocks. Constellation Software stock has gained nearly 24%, as of this writing. In my opinion, that’s an outstanding return, as the TSX has only managed a return of about 6%. That means Constellation Software stock has managed to quadruple the returns of the broader market since the start of the year.

However, investors should really take a look at Shopify. This stock has gained more than 70% over the past five months. This gain was made possible by a rally of more than 30% after the company presented its most recent earnings report. In it, Shopify reported US$1.5 billion in quarterly revenue. That represents a 25% year-over-year growth compared to Q1 2022. Not bad for a company that some people have deemed to be past its best days of growth.

Foolish takeaway

Constellation Software and Shopify are two of the most attractive tech stocks in the Canadian stock market. I believe both companies are solid competitors in their respective industries and could be excellent stocks to hold in an investment portfolio. However, due to the traction that Shopify possesses today, I think it stands out as a clear winner in a battle for the best stock between these two tech behemoths.

The post Better Buy: Constellation Software or Shopify Stock? appeared first on The Motley Fool Canada.

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Fool contributor Jed Lloren has positions in Constellation Software and Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Constellation Software and Netflix. The Motley Fool has a disclosure policy.


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