Big tech may be riding high, but there is still a lot of uncertainty in the software market. Valuations are highly sensitive to interest rate changes, which no one is able to predict with any accuracy. And while artificial intelligence (AI) has the potential to boost productivity, for some companies it could mean the destruction of their business. All this combines to create volatility – but also opportunity – for investors.
It is now two years since a sell-off took hold across the software industry. For years, scale had been viewed as the essential attribute for a software company, meaning businesses spent heavily in order to quickly add recurring revenue streams. This led to operating losses and, when interest rates rose, these high-growth businesses saw their share prices collapse.
Now, in 2024, a handful of profitable companies have emerged from the wreckage and are proving the resilience of their recurring revenue models. “The sector has always been a broad church of business models and end markets and so this variance is no surprise to us. It just means that stock selection is more paramount than ever,” Investec analyst Julian Yates said at the start of the year.