DCLA's Sarat Sethi: Position portfolio where valuations do not reflect long-term fundamentals
Speakers
Sarat Sethi
— Managing Partner, DCLA
Summary
Sarat Sethi argues that software stocks are undervalued relative to their cash flow and earnings growth, and he is selectively bullish on Intuit, Workday, Salesforce, and Roper Technologies. He expresses concern about Qualcomm's recent run-up and dismisses the Cerebras IPO at current valuations, while cautioning that not all cybersecurity or software names are alike.
- Software sector has seen valuation compression to 10-12x cash flow while earnings grow 8-10%.
- Sethi owns Intuit, Workday, Salesforce, and Roper Technologies as core positions.
- He expects these four software names to be 40-50% higher over time.
- Qualcomm is a concern due to its recent price doubling and weaker expected earnings.
- Cerebras IPO is not attractive at proposed valuations.
- Cybersecurity remains necessary but requires careful stock selection.
- Sethi contrasts value-oriented software investing with chasing semiconductor/DRAM trades.
- The discussion emphasizes long-term compounding and quality over quick trades.
Trade Ideas
Software sector cheap with growing earnings.
Software as a sector is making a comeback because it is now trading at 10-12 times cash flow, down from 20 times a year ago, while earnings are still growing 8-10% and balance sheets carry almost no debt. This valuation compression creates a compelling entry point for long-term investors, especially as software companies are integrating AI and remain essential.
Owns Intuit, Workday, Salesforce, Roper for gains.
Specific software names Intuit, Workday, Salesforce, and Roper Technologies have strong moats, forward-looking management, and are undervalued at current levels. He owns them in his core portfolio and expects them to be 40-50% higher over time, driven by earnings growth and cash flow stability.
Qualcomm overvalued; earnings growth weak.
Qualcomm has nearly doubled in a few months and next year's earnings are not expected to be as strong as the rest of the semiconductor sector, making it an area of concern. The stock appears overvalued relative to its near-term earnings outlook.
