SaaSpocalypse

Finding babies in the bathwater

Software is bad, the worst I’ve seen in my career. (and down yet another 4% today).

Here’s some charts (all of which have gotten worse since they were published)

Semis are on fire, Google just issued a 100 year “AI bonds” that investors couldn’t get enough of.

This is a chart of the Software index ($IGV) vs the Semi ETF ($SMH).

Software returns vs semis have literally never been worse.

I personally think these tech bros over dosed on reading The Outsiders (nearly all of them have admitted as much too).

Margin debt is jumping so perhaps we are just nearing the end of a massive bull run. Time will tell by.

I really enjoyed this article on the AI bear argument by Michelle Celarier.

However, the only question we need to ask: is there anything cheap here?

I think the death of software bear thesis is massively overblown. The idea that Becky from HR is going to vibe code a new CRM database and replace Salesforce seems highly unlikely.

There’s certainly other cheap software names but Constellation and Topicus are next level on capital allocation and management and have the highest fcf yields with similar growth to the sector. Also, Constellation and Topicus have no stock options unlike nearly every other firm which just ignore the massive expense in their guidance.

I figured getting back in to the names after they had their AI call and Mark Leonard had stepped down would be great timing however, I was far too early although I don’t think it matters much long term, just very painful short term!

Vertical Market Software just seems like such a safer place in software given its deep integration relative to one off or simple SaaS plays like Docusign, Chegg or Duolingo features that AI generally seems a massive threat to.

The TL;DR is VMS firms don’t compete on coding cost, they compete on trust and reliability. Survey after survey shows that customers are more likely to trust existing vendors to implement new AI tools.

This is hardly surprising, CSU has been in business for over three decades and successfully navigated multiple software revolutions. As historical services get commoditized new tech enabled services get layered on.

As Mark Leonard said in September.
”I believe that vertical market software is the distillation of a conversation between the vendor and the customer that has gone on frequently for a couple of decades. And you distill those work practices down into algorithms and software and data and reports and it captures so much about the business. And being able to examine that in a new way because of AI, creates new opportunity to modify and change and suggest new approaches. So yes, I'm hopeful that, that unique and proprietary information will be of value.”

The stock is in the tank, and unless I’m terribly wrong I just don’t see how these can’t compound at very high rates from here with little capital impairment risk.

There’s a scenario where if the AI narrative ever reverses then a lot of these software names could rally even in a bear market.

At its core you you have a top 1% compounder, at a multi decade low valuation, with multi million insider buys from the new CEO, world class management, yielding twice the 10 year yield and likely growing at least mid teens for many years (potentially even better as growth could now surprise on the upside given software acquisition prices are collapsing).

Anyways, here’s the Constellation and Topicus Globe & Mail article (PDF)

I will try and write more going forward! Might throw in some of my work with Tegus calls.