Most of the faang firms have 1-3% reduction.
- Cost of building software is going down
Agree. Beneficial for SaaS companies.
- Building competitors is easier than before
Agree, but not enough to be worthwhile building a competitor to SAP.
- SAP exists because buildling accounting software is expensive. The protection from that entry barrier is getting smaller.
The moat isn’t really in the software itself.
- The pricing power and the ability to yearly raise prices by 10-20% is going down
TBD.
- IT budgets got a big new line item with AI spend causing companies to try cut down on existing subsriptions
Agree.
- Companies are shrinking atm causing less revenue due to seat based pricing
I see a switch away from per seat pricing and also compensation from reduced seats by increasing per seat prices.
Companies can afford higher per seat pricing when they fire worker and replace with AI.
I don’t think they will ever trade back at the multiple that they traded at earlier in the decade
I think the massive PEs were overly exuberant. However, settling on 10-15 PE would make them quite attractive. Maybe they go from growth to cash cows.
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- SAP does a LOT more than accounting and does a decent job integrating it all.
- While it becomes cheaper to build your own ‘SAP’… it’s also cheaper for SAP to maintain and build new solutions at scale. What differentiates SAP vs. newcomer of course is a large installed base, integrated solutions and deep embeddedness in customers processes.
- Additionally, has a decision maker ever been fired for choosing SAP vs. some newcomer? Very unlikely. SAP is the safe choice.
I wrote some deep out of the money put options on Duolingo recently as well. That stock has been hammered by the AI risk (i.e. cheaper to build a new Duolingo or to just learn language with existing AI tools). I doubted that - you still have the entire user interface which is not easy.
I don’t doubt AI will have an impact, disrupt, etc. but incumbents have big moats and a lot of $$$.
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Agree on SAP. Disagree on Duolingo.
With SAP, a business is paying for support, maintenance and someone to sue.
I’m assuming Duolingo is more consumer based and consumers will use what is free/cheapest/good enough. I personally am using LLMs to learn languages over Duolingo. Plus I doubt they have much of a moat.
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Agree.
Maybe the market is not nuanced enough atm to differentiate well between different software and treats is as a basket. So there might be good companies to pick up. In general risk/uncertainty and predictability of future revenue has increased/decreased.
I find the semiconductor sector quite interesting and it can be argued that valuation are cheap atm (even after many names running 100+%). Micron is trading at 9 fwd p/e and Nvidia at a 25 fwd p/e. Historically semis have been a boom/bust industry but maybe this is changing.
There’s two ways to address that of course… valuations rising… or of course profits going down (not necessarily due to a recession or black swan event, but also due to new technologies - e.g. Cerebras Systems upcoming IPO must pull $$$ from somewhere if it goes through).
For sure not. That’s why I think there are good opportunities in SaaS right now. I had not invested in this sector until now, but it is now my biggest sector.
I’ll believe it when I see it.
While I am by no means an expert on or advocate for Duolingo, I believe they’ve done a remarkable job at ‘gamifying’ language learning resulting in stickiness of customers (once they get to paying).
In any case, tech is interesting for many reasons, one of which the speed with which players can be made obsolete.
This week is going to be crucial for tech
Hyperscalers delivered. This is a good yt series (ofc they talk their own bags so some skepticism is required) on the AI supercycle which has quite different economics than the previous software/saas cycle.
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