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There's been a number of posts on this sub the past few weeks about what software stocks are now "on sale".
I wanted to share my [post](https://eastwind.substack.com/p/the-saas-bloodbath-opportunities?r=5j48v) that highlights what's driving the current market sentiment, and why this sell-off represents a buying opportunity for both value and growth investors.
First off, if we summarize the current "drivers" for the negative sentiment, it's some combination of the following:
* Software companies monetize via seat-based pricing. If AI agents can do the work and there are more layoffs, then software vendors won’t be able to sell as many seats
* AI startups can move faster and win market share before incumbents can respond
* Enterprises now believe that they can vibe-code at least a portion of their software in-house
* System of records (Salesforce, Workday, SAP) might be priced as utilities if agents end up taking actions vs. humans
* Software companies are overvalued to begin: innovation is happening too fast for predictable cash flows in the "out years" and SBC is a drag on shareholder returns
I think at least some of these assumptions are incorrect or overblown.
**For value investors, mission critical software vendors have the chance to rerate**
The core idea here is that enterprises are overestimating their ability to build and maintain software in-house. At the end of the day, the cost of SaaS also pays for ongoing support, compliance, updates, security, SLA, etc. Once the “fully loaded” costs of development are factored in, building software in-house might be higher.
Therefore, beaten down mission-critical software vendors (SAP, Workday, Salesforce) have some time to reinvent themselves. This cloud mean keeping headcount the same -> introducing AI features faster, or focusing on efficiency (less headcount) and drastically improving the bottom line.
**Companies with “artificial limiters” have the chance to become multi-baggers after the recent sell-off**
My mental model is to use the concept of "**artificial limiters**". In essence, these are non-code moats like network effects, regulation, and physical infrastructure that make it harder for a new entrant to come in and allows an incumbent to maintain pricing power.
I'll list a couple categories (I expand on this in my blog post):
* **Social networks:** Meta, ByteDance, and Reddit sit on entrenched user graphs. In practice, that means more precise AI ad targeting, measurement, and model training.
* **Physical infrastructure networks:** Cloudflare is one example here. It operates a physical network (hundreds of points of presence ), has relationships with ISPs, and has significant knowledge of operating its network at scale
* Other categories that I touch on in my [blog post](https://eastwind.substack.com/p/the-saas-bloodbath-opportunities?r=5j48v) include enabling software infrastructure (e.g. Snowflake, Datadog), and fintech
So, the conclusion here is there really are three categories of software companies: companies that will actually get disrupted, "value" plays that will rerate, and AI beneficiaries that have non-software moats.
The link to the blog post is [here](https://eastwind.substack.com/p/the-saas-bloodbath-opportunities?r=5j48v).