On the subject of investing in synthetic intelligence (AI) for the long run, it’s simple to get caught up within the hype. Flashy start-ups and hovering valuations could make it tempting to guess large on the subsequent breakthrough. However in a Tax-Free Financial savings Account (TFSA), the place compounding over a long time issues greater than chasing momentum, I’d go along with one thing just a little totally different. I’d select Constellation Software program (TSX:CSU), a Canadian tech powerhouse that has not solely stood the check of time however continues to develop via a methodical and worthwhile strategy. If I might solely personal one AI inventory in a TFSA, this might be it. Right here’s why.
About CSU
Constellation isn’t the form of firm that grabs headlines. It’s not constructing robots or creating massive language fashions. As an alternative, it acquires and operates vertical market software program corporations that serve area of interest industries, from healthcare to utilities to municipal governments. These companies typically have loyal clients, steady recurring income, and powerful pricing energy. Over time, Constellation has acquired a whole bunch of those companies, knitting collectively a worldwide empire of dependable money flows.
That acquisition mannequin is the key sauce. In its most up-to-date quarterly earnings report for Q1 2025, Constellation reported income of US$2.6 million, up 13% from the identical interval in 2024. Web earnings got here in at US$115 million, or US$5.44 per diluted share, in comparison with US$105 million or US$4.95 a yr earlier. Working money stream reached US$827 million, and free money stream obtainable to shareholders hit US$510 million. That form of monetary power is uncommon in tech, particularly amongst corporations with a hand in AI.
The way it makes use of AI
The place AI comes into play is delicate, however essential. Constellation’s corporations more and more incorporate AI and automation into the software program they provide. It is perhaps predictive analytics for logistics, clever scheduling for healthcare, or fraud detection for monetary providers. These aren’t moonshots, however sensible instruments that enhance effectivity and make clients stickier. AI on this context turns into a value-add, not a distraction.
The corporate additionally accomplished combination money acquisitions of US$94 million (US$133 million together with deferred funds) throughout the quarter and invested US$174 million to accumulate 9.99% of Asseco Poland. That speaks to the scale of its warfare chest and its ongoing dedication to increase. Administration has at all times been disciplined in the way it spends. It avoids bidding wars and prefers to purchase corporations with long-term potential, even when it means slower development on paper. This conservative technique retains returns robust and dangers in examine.
Concerns
After all, no inventory is ideal. The share value, sitting close to $5,000, isn’t precisely approachable for everybody. It trades at a premium valuation, with a excessive price-to-earnings (P/E) ratio. Some traders could hesitate, considering the expansion has already been priced in. And it’s true that natural development stays within the low single digits, with acquisitions doing many of the heavy lifting. However that’s additionally why it really works, the mannequin is repeatable, and administration hasn’t strayed from what it does greatest.
The dividend is modest at US$1.00 per share quarterly, however that’s not the draw. This can be a long-term development story constructed on free money stream and compounding. The dividend is extra of a bonus, not the primary occasion. In a TFSA, the place earnings isn’t taxed and features construct up quietly over years, Constellation’s regular development turns into much more highly effective.
Backside line
There are sexier AI shares on the market, little question. However many include hype, losses, and hope. Constellation comes with income, revenue and a 30-year observe report of sensible acquisitions. It doesn’t attempt to reinvent the wheel; it simply buys the very best wheels and makes them higher.
For these seeking to maintain a single AI-related inventory in a TFSA for many years, it’s laborious to beat Constellation Software program. It’s not only a tech inventory. It’s a disciplined compounder with publicity to a number of the most essential technological traits, together with AI, whereas remaining grounded in fundamentals. It may not be flashy, nevertheless it works.
