No. of Recommendations: 17
It appears CSU is falling in line with several SaaS stocks, likely due to continuing perceived AI threats (and especially agentic AI developments, such as Claude's recent release).Here is an extremely thoughtful article about the possible implications of various coding tools for software verticals, with specific mention of how Constellation has made the economics work. Spotted at the "Science, Technology, Engineering and Mathematics" board, thanks to weatherman
https://findthemoat.com/2026/01/27/re-pricing-the-...To summarize it beyond the point of utility: for an investor, the main risk isn't that the clients will build their own tools. It's more that the barriers to competitive entry are lowered, so at the margin there will be more competitors. Ongoing spend to keep market share might hurt the long term economics of bond-like software products in non-growing niche markets, as they have traditionally relied on the fact that it just wasn't worth someone else's time (money) to build a new competitor in a small market.
It's very hard to say how much this going to be a problem for the economics of Constallation's past and future acquisitions. I can't see it killing them, but it has the ring of plausibility as a risk to consider. I can imagine this could cause their long their cash flow growth curve to flatten.
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On an entirely different front, there is another small concern I have with Constellation. They don't really focus on dividends, tiny and flat for ages, they reinvest in the business. Fair enough.
But, as their individual products tend not to grow much, the lion's share of their growth in cash flow generation comes from that reinvestment. So cash flow per share rises nicely over time. Again, fair enough.
However a given year's cash flow can only be used once: it can be used for fast growth of more cash flow, or as a non-growing cash cow (usually to dividends), but not both. You can consider it a firm with fast rising earnings that can never be paid out, or a cash cow firm without growing earnings that could pay it out. But you can't consider it as a firm with fast growing "owner earnings", because it isn't. A bit of the same issue I have with Davita but without their buybacks.
The question then arises: if you can't GET those earnings unless they stop the breeder reactor business model, should it be valued as a cash cow? i.e., maybe 9-10 times whatever the owner earnings would be now in a steady state? In other words, (1) if they never did another acquisition, what would they be worth today as a non-really-growing profitable firm? And (2) if they do more acquisitions in future (with earnings that could otherwise be sent out to you as dividends, say) then what is the explicit reasoning that the firm is worth more than in situation (1)?
The really short version: what is infinitely delayed "jam tomorrow" worth?
I'm not saying it's a terrible pick at these levels, and in fact I do own some. Just always trying to look for flaws in any investment thesis.
Jim
