The one stock you always refrained from buying because of its price could make a new record in 2025. Constellation Software (TSX:CSU) is trading above $4,500 per share and is the most expensive stock on the TSX in terms of the absolute dollar price. What does that mean? A stock is termed as expensive or cheap not in terms of price but the value it brings.

The value behind Constellation Software's $4,500 share price

To give you an everyday example, can you compare a $3 burger versus a $50 lunch buffet? Both are food items, but the price does not determine the value you get. If $4,500 looks expensive, consider this. Constellation Software never did a stock split. It kept acquiring small vertical-specific software companies under six operating companies, of which it spun off Topicus. For $4,500, you are getting exposure to six operating companies.

Constellation does not give a figure of how many companies it has acquired to date, but it goes into hundreds. Each company that it buys has a minimum of $1 million in earnings before interest and tax and 20% revenue growth. It has also acquired some exceptional companies with revenues exceeding $5 million.

All these revenue and earnings are accumulated in one stock. The more companies it acquires, the higher its valuation. At $4,500 per share, Constellation is trading at 6.8 times its sales per share and 33 times its forward earnings per share (EPS). Are these valuation ratios justified?

Since the company is secretive about its acquisition targets, you can look at the average numbers from the earnings to make a rough forecast.

Over the last 10 years, Constellation Software's revenue increased at a compounded annual growth rate (CAGR) of 17.5% and EPS at 18.5%. Such growth rates make a valid case for the above valuation ratios.

The price you pay for Constellation Software

The 2023 EPS of Constellation Software was $26.67. It might look like a drop in the ocean against the $4,500 stock price. However, if you compare it with Constellation's 2014 stock price of $222, this EPS is a rewarding return. The stock price is the future earnings expectations.

Assuming the company grows its revenue and EPS at the 10-year CAGR, we can expect sales per share of $11.6 and EPS of $37.45 in 2025. If we take a 10-year horizon and similar CAGR, sales per share could reach $49.55 and EPS $172.55 by 2034.

Investing tip

When you look at the value Constellation Software could derive 10 years from now, a $4,500 price might look like a great discount. Considering these average growth calculations, the stock could grow another 30% in 2025 through acquisitions.