StartUp / Ai Startups
Startup ecosystem signals, funding, and strategy insights. Topic: Ai-Startups. Updated briefs and structured summaries from curated sources.
Software’s Historic Market Discount
Full timeline
0.0–300.0
The current state of software valuations indicates that the sector is trading at historically low revenue multiples, particularly in comparison to the S&P 500. Growth rates for software businesses are significantly higher than those of the S&P 500, suggesting that software should eventually trade at a premium.
- Software is exceedingly cheap right now
- Revenue multiples for post-SaaS businesses are the cheapest in 15 years
- The software sector is trading at 19 times free cash flow, a discount to the S&P 500
- The median software business is ramping to 20% margins
- Software should trade at a premium to the S&P 500 over time
- The growth rates of software businesses are twice as fast as the S&P 500
- Free cash flow per share in the software sector is growing faster than the S&P 500
- Free cash flow per share is considered a leading indicator compared to gap EPS
300.0–600.0
The discussion revolves around the competition between established software businesses and new entrants in the market, particularly in the context of AI technology. It highlights the potential for AI to expand the software market by targeting labor costs and improving efficiency.
- There will be original businesses and SaaS businesses with deep customer relationships
- New technology leads to new entrants in the software market
- The question is who will win the incremental growth: existing software businesses or new entrants
- The software market is small, with S&P 500 companies spending about 3% of their op-ex budget on software
- AI-native businesses are targeting the labor market, aiming to replace repetitive labor
- The opportunity with AI is to expand the software market and take share from the labor market
- Cost savings from labor may lead to reinvestment in software and production capacity
600.0–900.0
The discussion focuses on the current state of the software IPO market, highlighting a shift from CapEx Lite to CapEx heavy models. It emphasizes the challenges investors face in evaluating unit economics and the volatility of post-IPO share prices.
- Theres been a change in the software technology ecosystem from CapEx Lite to CapEx heavy IPOs
- Investors have not been able to dig into the unit economics of new IPOs enough
- The IPO market is considered tricky due to past investor experiences
- Successful IPOs are needed for investor confidence
- Recent IPOs have shown sky high valuations that reset later
- Volatility in post IPO share prices is seen as unhealthy
- Investments are being made in businesses with sub two percent dilution and durable customer relationships
- Workday is viewed as one of the highest quality software businesses
- Companies like Walmart have no interest in replacing Workday with cheaper alternatives
- The transition of Workdays founders is seen as a positive development
900.0–1200.0
Customers are skeptical about the promises of AI and are demanding tangible proof of savings. The potential savings are linked to a labor market that has been described as ten times larger than previously stated.
- The time and effort to switch is not worth it
- Customers are looking for proof of AIs excitement
- Customers want to see actual savings from AI
- The savings are expected to come at a labor market
- The labor market is described as five times bigger, but later corrected to ten times bigger