Software sector faces earnings and sales misses
The bear case argued for the software sector is that multiple contraction will be followed by earnings and sales misses as companies struggle to maintain high margins while integrating costly AI tools.
The argument
The speaker argued that analysts' models incorrectly assume flat 80% gross margins and stable net margins through 2029. In reality, software companies will face pricing pressure from large enterprise CTOs who realize they can build their own AI tools, alongside rising costs to attach AI capabilities.
The thesis, stress-tested
✓ What validates it
- ✓Software companies missing consensus earnings estimates in upcoming quarters
- ✓CTOs successfully negotiating lower pricing on automatic SaaS renewals
▸ Risks discussed
- ▸Expensive software names may still face disruption
- ▸Enterprise customers may demand expert third-party software like CrowdStrike for liability reasons, sustaining their pricing power
Hear it yourself
"80% gross margin and the same net margin every year going forward, 27, 28, 29 in their models. And and how are they gonna attach all the AI tools that their customers need without some spending? And if you're a JPMorgan CTO or Morgan Stanley CTO, you're gonna pressure them on pricing eventually because you're gonna realize, oh, wait, guys. We can attach our own tools. We have a massive organization."
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