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At Constellation Software Inc.’s annual general meeting in the spring, CEO Mark Leonard joked about how the company’s stock was worth an “infinite amount.”

It was a bit of math humour based on the company growing faster than its own cost of capital, but it raised a legitimate question: What are the limits to Constellation’s growth?

Since going public in 2006, its shares have risen by more than 9,400 per cent, which translates into an average annual growth rate of 41 per cent.

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Constellation has become by far the country’s best-performing tech stock over the past decade-plus by sticking to a rather unglamorous business model – acquiring hundreds of niche industry software providers that are typically too small for private equity firms or venture capitalists to consider.

“This is a real Canadian success story,” said Ryan Bushell, president and portfolio manager of Toronto-based Newhaven Asset Management Inc.

“But I just can't wrap my head around how much fast money is in that stock, and what happens when the fast money runs the other way.”

Low and falling interest rates have fuelled an investor frenzy for growth stocks in general, and for software stocks in particular, pushing up valuations on hot names such as Constellation.

This year alone, Constellation’s shares are up by 54 per cent so far, inflating the company’s market capitalization to $28-billion, making it larger than both Great-West Lifeco Inc. and Imperial Oil Ltd.

“The multiple has just gone crazy this year,” said Christopher Blumas, vice-president at GlobeInvest Capital Management Inc. in Toronto.

At Thursday’s closing price of $1,320.03 a share, Constellation’s stock trades at about 32 times its current cash flow, according to Bloomberg data. By way of comparison, Google parent Alphabet Inc. trades at about 17 times cash flow.

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“It becomes a more risky investment with the risk of margin contraction, if they don't hit on earnings,” Mr. Blumas said. “There will be volatility.”

The stock’s last big stumble was in July, 2018, after a big earnings miss and investor concerns about the profitability of the company’s latest acquisitions. Constellation shares fell by 13 per cent over two days.

A healthy level of potential deals at good prices is crucial for any growth-by-acquisition strategy, and Constellation has increasingly faced questions about its acquisition pipeline.

The company’s willingness to answer those questions, however, has diminished somewhat.

Last year, Constellation cancelled its quarterly earnings calls with equity analysts, part of an effort to keep the company’s competitors in the dark. Instead, the company will occasionally post answers to shareholder questions submitted online, while also hosting an annual general meeting.

“We don’t even talk about the number of acquisitions we do any more,” Mr. Leonard said at the last AGM.

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But some of the company’s recent moves suggest the landscape for software deals is getting more competitive.

In February, Constellation announced a special dividend of US$20 a share, effectively returning about US$400-million to shareholders rather than using that money to chase deals. And in May, the company lowered the minimum rate of return, or “hurdle rate,” on potential deals larger than US$100-million.

“We believe the ability to deploy capital to generate returns at former rates has become more challenging,” National Bank Financial technology analyst Richard Tse said in a research note last month.

That’s not to say Constellation’s growth-by-acquisition model looks to be at risk, with recent acquisitions including French software company Salvia Développement SAS and MDS Global Ltd., a U.K.-based company serving the telecommunications industry.

But a lower hurdle rate means that Constellation is willing to pay more for those kinds of companies, which in turn may reduce the company’s growth potential looking ahead.

“But there are a lot of companies out there and we’re reasonably good at what we do,” Mr. Leonard said at the annual meeting. He said he’s confident in the company generating long-term growth rates of 10 per cent to 12 per cent annually, “which would be half of what were done looking back.”

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That kind of growth is still well worth paying for, though perhaps not at today’s valuation, Mr. Blumas said.

“But you’re never going to get it for a steal.”

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