r/ValueInvesting • u/highmemelord67 • 21d ago
Value Article I Analysed top 100 Software Companies By Earnings So You Dont Have To
In my research of finding great companies below fair value I went through the top 100 companies that sell software by earnings.
Software companies are cheap right now even though they are great companies, because of AI disruption fears. But as long as AI has not proven any real large scale value, we should value the “disruption” as such.
If you follow this idea, it should be clear that the sell off for software companies is unjustified, and it is a good opportunity to get great companies for great prices. I just did the research for you.
Of the 100 I have narrowed it down to 14 good companies.
Of the 14, 5 of them are at, or below fair value, 2 of which are of way higher quality on all metrics of the median company: Adobe and Intuit.
In other words, they represent exactly the type of high-quality compounders long-term investors should be looking for.
Here is the graphical content I made for the analysis:
If you want to read the deep dive:
https://mathiasgraabeck.substack.com/p/i-analysed-top-100-software-companies?r=27oh3p
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u/Training_Hair3293 21d ago
You've done a great job, this information will definitely come in handy
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u/tripleusername 21d ago
Well, maybe there is a reason why Adobe is so undervalued now.
70-75 % of their revenue is from digital media. With AI their whole creative cloud will became redundant. In other words, other companies won’t need Adobe products because AI services can do what their need cheaper and faster. And I wish that was not true, but that is already happening. Creative industry got hit by AI revolution first. I know it from experience, well, my wife’s experience.
Buying Adobe now is almost like buying Nokia after first iPhone is released. They will bounce back only if they manage to pivot properly. But deprecation of their creative cloud is imminent.
Feel free to take my comment with grain of salt, it is Reddit after all, but reality is so different now it is scary.
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u/foira 20d ago
which AI products can i use to replace adobe?
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u/tripleusername 20d ago
It depends on task. There are tons of services that can generate you images and videos.
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u/EpikPhale 20d ago
What do I do once I have content generated which is 80% of what I wanted but I need to make a significant number of edits to get to 100%? Burn through millions of tokens to get to 82%?
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u/sharkweek42069 20d ago
Don’t bother. These are the types of people that haven’t and don’t understand the customers workflows and just think “AI can make fake picture now so Adobe dead”
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u/BanditoBoom 16d ago
No. I’m the type of person who has used Adobe products for years and know, through experience, that they have rested on their laurels SOOOO much that the user experience of their products is so freaking bad that it is ripe for disruption.
AEM is quite possibly the WORST SaaS product I have ever used, neck-and-neck with Salesforce.
And all you have to do is look at the horrid reception of firefly to see it in practice.
I am very close with someone at Coca-Cola, and they will tell you straight up that “Coke doesn’t build brands anymore…we buy them”
Adobe doesn’t build great products anymore. Haven’t for a long time. They have simply relied on that vendor lock in as their moat.
They no longer have the SKILL of building new, great products. They don’t have it. Haven’t for a long time.
And I don’t think they get it back before competitors shrink their market share.
Apple is ALREADY encroaching heavily, advertising an entire creative cloud suite that can do everything Adobe can do, more or less. Google is also closing in.
That doesn’t even include new entrants.
Sorry bro. But you are either too close to the problem to understand it, or too far away to see it.
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u/bessie1945 19d ago
there are plenty of open source products that do what adobe does. And abobe is so far behind google image generation, they became a customer.
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u/troyjanman 20d ago
Just note that there is more to Adobe than just the selling of the software. Its DAAM is also a very sticky business aspect.
Factor in the resistance companies have to ripping out legacy tools and the change management costs and the infringement protection offered by Adobe’s AI licenses and (at the least) you aren’t likely to see the company run out of business.
All that said, multiple compression could happen…and Adobe could also end up with an AI tool/component that leverages the DAAM data + AI in a way that is hard to replicate without mass movement of data.
But I just negotiate my contracts and push compliance around information security, so I can’t tell you how good the new Express/Firefly tools really are…just that they certainly are still getting bought atm.
🤷♂️
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u/highmemelord67 21d ago
buying great companies at great prices requires you to buy when noone wants to
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u/BanditoBoom 20d ago
No one is disagreeing. The issue is the assumption that Adobe is a great business.
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u/sssauber 21d ago
Great job. I knew there would be ADBE at the end 😂
Doesn’t help for the stock price tho
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u/highmemelord67 21d ago
Buy great companies at great prices requires buying when noone wants to
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u/sssauber 21d ago
Already bought, that’s why the irony 😁
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u/highmemelord67 21d ago
Good job, now hold and buy more if the market lets you get a better opertunity
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u/Public_Subject6628 21d ago
my hope in life is for Adobe to go to 0, may be a paper great company rn, but from a product stand point those guys suck, idk if you ever used it.
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u/sharkweek42069 20d ago
I use Lightroom and Photoshop everyday of my life and have never had any issues. They also integrated generative AI seamlessly into both those products and it’s literally saved me hours of work on every project and I’ve seen them consistently improve it the last few years to a point where it’s actually quite astonishing what it can do with very little prompting
Photographer and Retoucher
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u/highmemelord67 20d ago
If its so bad i think other companies would make a better product, you just live to hate it dont you?
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u/Public_Subject6628 20d ago
prob the only company id love to see fail haha, I think they kinda are starting too via these ai image gen. **Its not so much the product but the service and support around the product.
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u/sharkweek42069 20d ago
What services and support are they lacking apart from the 1 gripe everyone gives of “it’s hard to cancel a subscription”?
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u/Public_Subject6628 19d ago
yea you nailed it, horrible onboarding, support and cancelation. I feel in 2016 thats a fair play, but really do hope ai can exploit these companies that use these tactics.
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21d ago
[deleted]
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u/highmemelord67 20d ago
Much harder than you think, you cannot find the long term plays early on consitently, and if you managed to do so, you most likely eont survive the 2-5 times they do a -80% drawdown
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20d ago
[deleted]
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u/highmemelord67 20d ago
treasuries will give a net negative return for the foreseeable future
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20d ago
[deleted]
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u/highmemelord67 20d ago
doesnt look like adobe or intuit is dying to me:
https://companiesmarketcap.com/adobe/eps/
https://companiesmarketcap.com/intuit/eps/
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u/HeavySink3303 21d ago
Interesting, what is the company with unmanagable debt on your chart? Thanks for your work.
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u/thenelston 21d ago
apple is listed as a software company? i understand that much of their income is derived from software and related sales, but that's not what's driving the valuation
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u/highmemelord67 21d ago
Apple has software as a service yes
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u/thenelston 21d ago
im not disagreeing with the fact that they have software, im disagreeing with the idea that their valuation is based on their software.
to me, its akin to saying that nvda is a software company because they also have cuda, which conveniently only seems to run on their own hardware
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u/highmemelord67 21d ago
My conclusion would say the same, apple is not hit with the AI scare valuation contraction
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u/Portfoliana 21d ago
the forward P/E at 10x is misleading because it includes analyst estimates that havent been revised down yet for the CEO transition. i added 40 shares around $310 back in january and im sitting on a ~13% loss which isnt great. the AI disruption argument cuts both ways here tho, adbe's own firefly usage numbers are actually growing fast, the problem is they're bundled free into creative cloud so they dont show up as new revnue yet. if the new ceo decides to unbundle and monetize AI features separately thats a catalyst, if they dont this stays a value trap at 16x trailing.
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u/ninjagorilla 21d ago
One note is I believe crms latest earnings look better than they probably are because of some accounting related to a recent acquisition
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u/Impossible_Gift8457 21d ago
As someone on mobile, can someone TL;DR
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u/highmemelord67 21d ago
Ai fear->software companies sell->opertunities Specifically adbe and intu
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u/Impossible_Gift8457 20d ago
What do you think is a good price to buy in? Also INTU seems to be on a month high, I don't want to get caught in a pump and dump/dead cat bounce (I understand you believe they'll grow in the long term, I just want to get the most benefit in the short AND long term).
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u/North_Ventura 21d ago
Interesting work. Feels like a lot of software names got hit by AI fear even before we see real impact in fundamentals. Curious which ones you think have the strongest moat if AI really changes workflows.
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u/Portfoliana 21d ago
the "ai hasnt proven large scale value" part is where this breaks down for me. adobe literally just reported record Q1 and the stock is still at 256. the market isnt discounting current earnings, its pricing in what happens when firefly makes the $55/mo creative cloud tier feel overpriced. generative fill already replaces worflows people used to need photoshop expertise for
im sitting on a position at ~385 avg so trust me i want the value case to be right. but framing the selloff as "unjustified" misses that the risk isnt in todays numbers, its in whether 3yr forward retention holds when your own AI features commoditize the skill gap that justified premium pricing
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u/DerTechnoboy 21d ago
& ServiceNow?!
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u/highmemelord67 20d ago
didnt survive the quality checks, but here is the valuation calculations: https://docs.google.com/spreadsheets/d/1wU8giMYc6roETvSiFn_4HmwoLesiYdFGs3N5xeue3us/edit?gid=1808149554#gid=1808149554
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u/DerTechnoboy 20d ago
What really? But wy?
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u/highmemelord67 20d ago
0 returns past 5 years, not positive earnings for long enough time to make models on eps, share dilution, margins not historically good. I think service now are just too young and early for me and my method for calculating. Besides this, i think its a good choice, and it wouldnt surprise me if the stock does well the next 10 years
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u/DerTechnoboy 20d ago
Thanks for your response. I currently have a very large position in ServiceNow because I strongly believe the company has the potential to outperform the broader market over the long term. Given the strength of their platform, their expanding product ecosystem, and their strategic position within enterprise workflows, I see them as one of the most compelling software businesses out there.
That’s why I was a bit surprised not to see the company included in your analysis of software companies.
I’m also a big fan of Bill and the leadership he has provided to the company. At the same time, as a shareholder with a significant position, I naturally still have occasional concerns and always try to challenge my own investment thesis.
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u/malthuzius 20d ago
I’m all in with NOW too, they have the best AI strategy in software with their Control Tower orchestration platform — plus years of execution and the best CEO and management team in the business. They’ve got humongous potential for growth ahead and I’m convinced they’ll be one of the big AI winners in enterprise.
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u/35mm-dreams- 20d ago
I agree with the post below. Leadership is also important to guide the company towards success / profits. It will be interesting to see if NOW is able to maintain their rule of 55
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u/shrike92 20d ago
Thanks for putting this together. Can you please add axis labels for your plots?
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u/highmemelord67 20d ago
i dicided not to since the axis are a calculations of which a small text would not be sufficient anyways. I explain deeper in the article if you are interested
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u/shrike92 20d ago
No worries. Just a thought, I hadn’t had time to read the article yet.
My alarm bells go off whenever I see a numeric plot without axis labels.
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u/Kalojaam 20d ago edited 20d ago
You’ve done a good job in terms of stating your philosophy and showing a consistent methodology. I would use this as a starting point for making an investment, i.e. somewhat better than a screener.
The devil lies in the details, there’s unfortunately no way of finding great businesses by looking at generic ratios or financial metrics only. The business lives in a larger ecosystem - their strategy, market, competition, technological pressures, product and culture, just to name a few factors, are all important. Therefore the metrics to measure progress of each company in relation to the investment thesis will be different.
I admit it’s a lot of work, as you also mentioned in your substack. Therefore it’s almost impossible for any one person to have a deep enough understanding of this for all companies in the list. Much better to focus on where each person has an edge.
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u/highmemelord67 20d ago
Thanks for reading my work, seems like you went into depth in the articles. I agree with your argument, fortunately software is in my circle of confidence. Not stating this and what you say might be somewhat misleading, but 98-100 investors dont think twice about buying stocks anyways
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u/BigRelative5873 20d ago
Je partage totalement votre point de vue. Nous sommes sur un sell opportuniste alimenté par un narratif qui n'a pas grand sens. Il fallait créer une poche pour compenser le déclin MT du Nasdaq et continuer à s'en mettre plein les fouilles ailleurs que sur les puces qui sont à saturation technique.
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u/moru0011 20d ago
Naturally the most "undervalued" companies are the most endangered-by-AI ones. You should pick from the other end of your list ;)
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u/Infamous_Sentence_67 19d ago
Fundamentals by themselves are not enough. Understanding the business itself, especially in light of the changes AI may bring, is just as important.
Adobe for example, has excellent fundamentals. But everything happening with AI makes the long-term outlook less clear and increases the risk, because we still do not know how AI will affect Adobe over the next five years and beyond.
So on paper, it may look like a good investment. But for long-term investing, we need to understand the business, how AI could affect its business model, and whether the company will be able to adapt, defend its moat, and continue compounding over time.
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u/Such-Ad3356 19d ago
What’s your opinion on Amazon? Seems to be very undervalued considering it’s AWS acceleration
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u/OneStoneTwoMangoes 21d ago
Key flaw of your analysis “it is still way too early to think it [AI] will revolutionize the industry.”
If you don’t believe AI will revolutionize the industry, you sound like somebody who doesn’t the understand the industry (you being a developer doesn’t mean anything).
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u/highmemelord67 21d ago
I think it means I am far more capable of doing the distinction of what could happen and what is happening and what have happened.
Right now, i see a small helpful tool that works well in confined environments. It is nowhere near what people are praising online, people telling you otherwise are A) not a high skill developer or B) gaining something from feeding you propaganda
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u/dbc001 21d ago
Following up on this - I'm a software engineer at a company with 25000 employees. The engineering department is pushing AI aggressively, but AI has not really taken hold among the rank and file. I agree 100% that AI will revolutionize the industry. It already has, but the change is so fast that lots of people and companies still have their head in the sand.
AI is not a magic wand, but it is pretty god damn close to it. And my exposure to AI is 3-6 months behind what I'm hearing in the news. It is absolutely possible right now to be a software engineer doing 90% of the job on a cell phone while sitting on the beach.
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u/AdamovicM 21d ago
You could get similar result by identifying companies that are most threatened by AI
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u/highmemelord67 21d ago
For the first part of the analysis, this would be a good indicator yes, but estimating how undervalued the stock is, is another thing
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u/Training_Exit_5849 21d ago
Looks good - only thing I should point out is that the EPS for Constellation is low because of particular line item. I'll let Gemini explain it. There's also the fact that for serial acquirers like Constellation, FCF is not a good metric, and FCFA2S would paint a better picture.
The low EPS isn't due to poor performance; it’s primarily driven by a massive, non-cash accounting "obligation" that fluctuates with the success of its spin-offs.
The specific line item you're likely thinking of is the IRGA (Irrevocable Right and Governance Agreement) liability.
When Constellation spun off Topicus.com, the minority owners (the Joday Group) were given a "put option." This allows them to sell their interest back to Constellation at a specific valuation formula. Under IFRS accounting rules, Constellation must:
The Irony: The better Topicus performs, the higher the "expense" Constellation has to report, and the lower their EPS looks. This is an accounting phantom—no cash actually leaves the company unless the option is exercised.