Software valuations opportunity…

THE DATA.

1. Software valuations near trough levels.

Lowest in a decade.

2. Software sales reps hitting quota

41% of reps hitting quotas

3. Global rate cuts

Over 40% of central banks cutting

?? THIS WEEK

Happy Friday! As I write this Netflix is just wrapping up its earnings report. Lots of positive news on state of consumption in the report. Overall though, what 7 days can do to a market and the perception of the future. If you have been following our work then you know that we have been calling for a move of sorts into small and mid cap stocks relative to its large cap counterparts driven by valuations, the reality of rate cuts coming, and significant imbalance of allocation in favor of mega caps. while I generally don’t focus on three month increments, however I do think the next three months will be significant for a soft landing to “land”. This probably isn’t the format to elaborate further however, if we do land, the economic plane and signal rate cuts soon, I think the next 12 to 24 months will be significant for small and mid caps. Now look at the data below on software more specifically…

Data #1

Software Valuations Are Near Trough Levels Over the Last 10 Years

Why does this data matter?

Software has historically been a favorite sector among investors for over a decade. Over the last two year however, there has been a noticeable shift in perception, partly influenced by economic concerns such as potential job losses amid negative economic indicators in the US and globally, exacerbated by high interest rates.

The chart above illustrates enterprise value-to-sales and enterprise value-to-EBITDA ratios within the software industry. It clearly indicates that valuations are currently approaching their lowest levels in recent times.

From our perspective, while this data represents an aggregate index, in our day to day we see numerous software companies pivotal to organizations, actively innovating their products and are currently trading at traditional value investor valuations (sub 15x cash flow). In fact, these could be some of the most appealing valuations we've seen at the individual company level in a considerable period. The next chart helps.

Data #2

Data Shows Software Sales Rep Quota’s Being Hit The Most in 3 years

Why does this data matter?

While standalone software valuations are currently attractive, it's crucial to consider when there might be a catalyst for these valuations to increase. This typically occurs in two scenarios: when growth accelerates, driving up current valuations, or when the risk-free interest rate decreases, also pushing valuations higher.

The chart above is data on software company sales representatives' quota attainment. This metric indicates the percentage of sales reps achieving their quotas, comparing different quarters across various years. While one quarter alone doesn't provide a definitive answer, we observe a notable increase in quota attainment among sales reps, reaching the highest level in over three years. This is very constructive info.

Data #3

Global Rates Being Cut Globally, a Catalyst for Re-Rating of Valuations Higher

Why does this data matter?

Last but not least, is the chart showing the percent of countries cutting across the globe. Nearly half of central banks are cutting rates. As we have known over the last several decades is that central banks generally want to stay somewhat consistent with one another. We are either two weeks or three months away from the initial rate cut in the US, which is highly supportive for valuations over the medium term.

About Avory & Co.

Investing where the world is headed.

Avory specializes in high-conviction equity strategies, emphasizing Secular Growth and Transformation Stories driven by exceptional teams. Data guides decisions. We cater to high net worth investors, family offices, and institutional investors. Note: This information doesn't constitute a recommendation to buy or sell any mentioned securities. Avory is based in Miami, Florida with clients all across the globe.

Speak to us: Schedule a Brief Zoom Meeting

Send us an email: [email protected]

Want to invest? We are on most platforms.

Want More

?? Avory YouTube Channel

??? Avory Podcast

Disclaimer: Not a recommendation to purchase or sell any securities mentioned. This is for educational purposes only.