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Somebody’s (Badly) Wrong About Software Stocks
With US software stocks down -- checks notes -- 30% in four months, it's fair to ask if the "SaaSpoc
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Couldn’t agree more, for example, software company UiPath has been caught up in this rotation as a more traditional vendor, but it has crucially released agentic AI in its product line up with its Maestro product that has been received exceptionally well by customers. Its AI capability works alongside its deterministic robotic process automation capabilities and allows clients to make use of AI in a more seamless manner.
The shares are trading on a 2026 PE of 14.7x earnings and have fallen circa 45% since December. Bonkers!
Software professional here. I agree. It compliments these businesses.
These headlines purporting that AI is going to do literally everything are in the dog and pony show so that the IPO goes big. It’s always a big tech or prominent tech company executive who is going to get very very rich when these companies IPO.
Have we seen the test where we ask AI whether we should drive to the car wash when it’s 50 meters away. LLMS are going to hit their limit. God bless them. It’s truly a great time to be an employed software professional in a good culture.
I have not and don’t plan on betting against AI, especially when teamed up with the likes of Microsoft, Google, Nvidia, Broadcom, etc.
GLTA.
As for costs, I’m reading and hearing a bunch of comments recently about how much it’s costing in some companies. Those who are racing to build automations and really smart tools from this really smart tool, are running into expensive overruns when they need to buy more tokens (essentially processing power) to work on these models. And they’re not even paying for the extra energy load yet. That push seems to be on the horizon.
But clearly speed to market in this era may make the dot com boom seem pokey in comparison.
A lot of SaaS stocks are just abstract constructs to investors, who usually have never used the software themselves or even seen anyone use it. The companies report lots of metrics, some more made-up than others, but at best they tell you how the company is doing now and its visibility for a year out. The concern is further out than that; no-one thinks AI is seriously affecting SaaS sales “right now”. Valuations have come down, a lot in some cases, and may look cheap for 30% growth and 25% net margin, but suppose growth becomes 20% and that’s a non-GAAP margin. So most investors are trying to guess the threat to software that they barely know anything about, from a technology that they also don’t understand with a future potential they can’t know. The confidence is not very high. The FUD is high. The AI propaganda is relentless.
It is tempting to be a hero and catch some falling SaaS knives, but as AI fear cycles through different industries, there are alternative catchable knives that aren’t SaaS, are in the physical world, more concrete to investors and where you don’t have to pretend that stock comp isn’t real. I’ve recently done a bit of the former but a lot more of the latter.
” So most investors are trying to guess the threat to software that they barely know anything about, from a technology that they also don’t understand with a future potential they can’t know.”
+1
That said, the same holds for AI as well, no?
Yes. Thus, in a scenario of “no landing” and AI risk & uncertainty it makes sense to own more “real economy” names and less tech. Not that technology and AI are the same, but in market cap terms they may as well be. So much market cap in tech that even a moderate shift in this direction is a major tailwind for the recipients. Of course, if “no landing” is wrong then . . .
This is a classic plow and plow shares example. Do not invest in plow shares invest in plows, plow owners or suppliers to plow owners. Someone has to store and maintain all the data ai develops. Memory chips, computers, data warehouses and other long term data storage.