I think the SaaS sell-off and the regional bank sell-off are very different setups.
First, time was your friend with the banks and potentially your enemy for SaaS. When regional banks traded at 0.5x tangible book, because they were holding lower yielding securities (often with practically no credit risk), every quarter that went by meant more securities matured, reducing unrealized losses and freeing up capital which would be reinvested at higher rates, mechanistically growing earnings. So time forced the appreciation back to 1.0x tangible book.
Second, the risk was symmetrical for banks (will we have a run), and asymmetrical for SaaS (asymmetric risk requires a sector specialist). Every quarter that goes by will mean better AI, which will cause some SaaS companies to be more valuable while others will be less valuable (can you tell the difference between the winners and the losers?).
A key hint of the difference between the regional banks and SaaS, is that you could have just bought every regional bank trading at 0.5x tangible book and every one would have worked (symmetric), while you would never even consider doing something analogous in SaaS (because the threat is of different severity for each SaaS business).
Therefore, the SaaS sell-off is not an analogous setup to the regional bank sell-off.
I definitely hear where you're coming from.... but there were certainly worries about run on the bank risk at the regionals.
Also, not sure i love the argument on the accretion math; again, understand where you're coming from, but many of these banks were trading at like 2x book if you marked their loans to market. If you waited for them to accrette and then got out at book, you'd have often gotten a really poor IRR. Still better than nothing, but I thought the real trick was to buy the ones that didn't have those
Good article, Andrew, and I also enjoyed your Random Rumblings on the same topic. You have gotten down on paper what I have been struggling with also. Ultimately, I think that the opportunity could be incredibly attractive (or could be a graveyard) and as a generalist have decided to outsource the decision to CSI.
CSI has a tremendous track record of navigating previous difficult industry changes and disruptions (though recognize this one is unique), and I actually trust them to do the right thing and make good decisions with the capital. They are down even more than many of the SaaS names, but I fundamentally think their businesses are better positioned than most. I also trust that they are closer to the ground and will either recognize that these things are all going to zero and effectively manage the companies for cash generation and run-off or will take advantage of the opportunity and buy these up on the cheap and see valuations normalize. I do not trust another company in the space to do anything similar.
If these things are all going to zero, I can a scenario where they effectively operate like a declining yellow page aggregator that buys these things on the cheap for cash flow and make attractive ROIs. CSI's history has shown that they have done the best in recessions and market dislocations and think this time will turn out very similarly (though the path is unknown even to them).
CSI is also trading at FCF2S at around 18x, which is cheaper than virtually anyone else and also doesn't suffer from the same SBC issues. Worst case scenario these things go to zero, they are late in recognizing they all go to zero, and are late in returning cash to shareholders--I think shareholders take a hit but the downside is much softer than most even in a worst case scenario.
I ultimately have made CSI a 10% position (started about 1 month ago so was definitely early), but I still struggle with whether I've made a mistake or should dramatically increase the position...
I find CSI fascinating; you are probably right about the outsourcing, but if the SaaSpocalypse is truly here they are hit just as hard as anyone and they're starting from a premium valuatin....
Getting more and more convinced of the CSI argument. Most of the rest of SaaS is not priced anywhere close to a reasonable margin of safety, and as Andrew pointed out SBC looks like it will be a huge issue.
CSI probably already operates how software will in future: decentralised, hyperfocused on niches and low growth. But I don't think it's immune to the general trends: lower margins due to AI capex, inference costs and more competition. So I think the perception will stay for a while.
I can echo some of the examples about how things are always slow to change. I am a web engineer who contracts mostly to financial companies. So often I can't get persuade a client to use a Google Doc instead of a .Docx file, or sign up for the simplest of PM tools because of the resistance to using anything different to exactly what they are used to - and these are otherwise very smart people! One company reached a certain size and went through onboarding to ServiceNow, there is no way in hell they want to do that again soon or - literally pause to laugh out loud - build something internally.
Has anyone noticed how much SAAS spends on S&M? Apparently software - vibe-coded or otherwise - doesn't sell itself. There's many reasons for that. Perhaps that points towards the real moat?
Great article Andrew. In the coming weeks when the blackout periods end, it will be interesting to see if the SBC addicts (executives) can turn their free addiction into a paid addiction...something tells me that is going to be hard for them.
Paralysis analysis? Can't we just agree that SAAS has been trading at a premium to fundamentals for years, time and again, valuations assumed 20%+ growth in perpetuity, and that just does not happen. A VMS software aggregator like CSU.TO is a great company, but a bad investment at 40x FCF. And yet I don't see owner/operators churning their golf course, trucking company, etc. workflow critical software for something both inaccurate and expensive to maintain as AI. At 10-15x FCF (still trading today at 20x) with 20% FCF growth CSU.TO is probably a good investment.
Every company making products that could be moved through fiber optics will see changes in all five sides of the porters 5 forces framework…might turn out good for some, horrible for others.
I think the SaaS sell-off and the regional bank sell-off are very different setups.
First, time was your friend with the banks and potentially your enemy for SaaS. When regional banks traded at 0.5x tangible book, because they were holding lower yielding securities (often with practically no credit risk), every quarter that went by meant more securities matured, reducing unrealized losses and freeing up capital which would be reinvested at higher rates, mechanistically growing earnings. So time forced the appreciation back to 1.0x tangible book.
Second, the risk was symmetrical for banks (will we have a run), and asymmetrical for SaaS (asymmetric risk requires a sector specialist). Every quarter that goes by will mean better AI, which will cause some SaaS companies to be more valuable while others will be less valuable (can you tell the difference between the winners and the losers?).
A key hint of the difference between the regional banks and SaaS, is that you could have just bought every regional bank trading at 0.5x tangible book and every one would have worked (symmetric), while you would never even consider doing something analogous in SaaS (because the threat is of different severity for each SaaS business).
Therefore, the SaaS sell-off is not an analogous setup to the regional bank sell-off.
I definitely hear where you're coming from.... but there were certainly worries about run on the bank risk at the regionals.
Also, not sure i love the argument on the accretion math; again, understand where you're coming from, but many of these banks were trading at like 2x book if you marked their loans to market. If you waited for them to accrette and then got out at book, you'd have often gotten a really poor IRR. Still better than nothing, but I thought the real trick was to buy the ones that didn't have those
Good article, Andrew, and I also enjoyed your Random Rumblings on the same topic. You have gotten down on paper what I have been struggling with also. Ultimately, I think that the opportunity could be incredibly attractive (or could be a graveyard) and as a generalist have decided to outsource the decision to CSI.
CSI has a tremendous track record of navigating previous difficult industry changes and disruptions (though recognize this one is unique), and I actually trust them to do the right thing and make good decisions with the capital. They are down even more than many of the SaaS names, but I fundamentally think their businesses are better positioned than most. I also trust that they are closer to the ground and will either recognize that these things are all going to zero and effectively manage the companies for cash generation and run-off or will take advantage of the opportunity and buy these up on the cheap and see valuations normalize. I do not trust another company in the space to do anything similar.
If these things are all going to zero, I can a scenario where they effectively operate like a declining yellow page aggregator that buys these things on the cheap for cash flow and make attractive ROIs. CSI's history has shown that they have done the best in recessions and market dislocations and think this time will turn out very similarly (though the path is unknown even to them).
CSI is also trading at FCF2S at around 18x, which is cheaper than virtually anyone else and also doesn't suffer from the same SBC issues. Worst case scenario these things go to zero, they are late in recognizing they all go to zero, and are late in returning cash to shareholders--I think shareholders take a hit but the downside is much softer than most even in a worst case scenario.
I ultimately have made CSI a 10% position (started about 1 month ago so was definitely early), but I still struggle with whether I've made a mistake or should dramatically increase the position...
appreciate the kind words
I find CSI fascinating; you are probably right about the outsourcing, but if the SaaSpocalypse is truly here they are hit just as hard as anyone and they're starting from a premium valuatin....
Getting more and more convinced of the CSI argument. Most of the rest of SaaS is not priced anywhere close to a reasonable margin of safety, and as Andrew pointed out SBC looks like it will be a huge issue.
CSI probably already operates how software will in future: decentralised, hyperfocused on niches and low growth. But I don't think it's immune to the general trends: lower margins due to AI capex, inference costs and more competition. So I think the perception will stay for a while.
I can echo some of the examples about how things are always slow to change. I am a web engineer who contracts mostly to financial companies. So often I can't get persuade a client to use a Google Doc instead of a .Docx file, or sign up for the simplest of PM tools because of the resistance to using anything different to exactly what they are used to - and these are otherwise very smart people! One company reached a certain size and went through onboarding to ServiceNow, there is no way in hell they want to do that again soon or - literally pause to laugh out loud - build something internally.
Good piece. You're not alone. The uncertainty here is massive.
Has anyone noticed how much SAAS spends on S&M? Apparently software - vibe-coded or otherwise - doesn't sell itself. There's many reasons for that. Perhaps that points towards the real moat?
Thanks for the post. Reflects some of my sentiments too which seem to be constantly swinging back and forth between the angel and devil.
Great article Andrew. In the coming weeks when the blackout periods end, it will be interesting to see if the SBC addicts (executives) can turn their free addiction into a paid addiction...something tells me that is going to be hard for them.
completely agree. insider buying is almost a practiced skill, and all of these guys only have experience selling.
Paralysis analysis? Can't we just agree that SAAS has been trading at a premium to fundamentals for years, time and again, valuations assumed 20%+ growth in perpetuity, and that just does not happen. A VMS software aggregator like CSU.TO is a great company, but a bad investment at 40x FCF. And yet I don't see owner/operators churning their golf course, trucking company, etc. workflow critical software for something both inaccurate and expensive to maintain as AI. At 10-15x FCF (still trading today at 20x) with 20% FCF growth CSU.TO is probably a good investment.
Every company making products that could be moved through fiber optics will see changes in all five sides of the porters 5 forces framework…might turn out good for some, horrible for others.