Software valuations outpace realistic business durability
The guest argued that high-valuation software companies are priced for unrealistic growth and margin durability, making them risky for passive index investors.
The argument
Chris Davis noted that fewer than 2% of companies sustain 20% revenue growth for a decade, and fewer than 0.2% maintain margins above 50% for that long. He warned that passive indexes are slow to adapt to decaying business models, citing Kodak's rapid demise despite its historical dividend aristocrat status.
The thesis, stress-tested
✓ What validates it
- ✓Software sector multiple contraction
- ✓Earnings misses or margin compression among high-flying software names
▸ Risks discussed
- ▸High-multiple software companies failing to meet 20% growth or 50% margin assumptions
- ▸Passive index lag in removing disrupted companies
Hear it yourself
"Whereas I started with a three or 4% position, and when it went to six or seven, I was like, oh, trim it back to six or five. And so any honest investor will tell you their biggest mistakes were what they sold, when you find a really wonderful company. But you have to balance that with two things. One, the investment act of 1940, which has rules about diversification. And then second, the idea that I'm willing to take that volatility, but that could be very hard on a teacher or a nurse who has their life savings in us and is unable to absorb a 20% idiosyncratic hit. Right? I"
AFFILIATE LINK · ZORTIX MAY EARN A COMMISSION · NEVER A RECOMMENDATION TO TRADE