Invest at your own risk; this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.
I hope you had a great start to the year. I certainly did. My portfolio is uncertain about the start of the year and has mixed feelings. While my two largest holdings, ASML (+32% YTD) and Alphabet (+3% YTD), had a fantastic and a decent start, some other companies did not fare so well. That’s why I chose the title image of this article. A cozy house surrounded by dark clouds.
Adobe (-24%) and Salesforce (-29%) are dropping like rocks in line with most software stocks. Even companies such as Microsoft are down 18%, and Amazon dropped as a result of the earnings to -10% YTD. Indeed, a very heterogeneous picture.
I wrote about the reason for the sell-off in software and especially SaaS companies here. Make sure to read the article to understand what the heck is going on right now:
What is going on with Software stocks / SaaSmageddon?
I hope you had a great start to the year, and you are working on becoming the best version of yourself for this year.
As you might have guessed, the threat of AI replacing everything and everyone is the big thing that keeps investors up at night. To understand the current state of AI, make sure to read this article:
AI eats the world
AI eats the world has become a phrase that is stated very often these days. It used to be “software eats the world” in the early 2010s, and increasingly, it seems that AI is having a feast now.
Now that you are familiar with AI and what is happening in software stocks, let’s get right into it:
Best Buys today
I have included this quote in my article in December, and I decided to include it again. This quote is just too good and fits perfect to this moment in time.
Adobe
You will find my Adobe deep dive here. Make sure to read it to learn more about this fantastic company:
Adobe - The Return of the King?
Intro While lying in bed, the title of this article came to me: The Return of the King. This is the title of the third Lord of the Rings book, and this is also my third long piece on Adobe on this Substack. I am a large Lord of the Rings fan, and the title of the third and final book seems fitting, albeit a question mark is justified. In this article, I will elaborate on whether we are dealing with Aragorn, who reclaims his throne, or with Gollum, who chases the elusive ring and never regains it. Lord of the Rings fans know the end: Aragorn is crowned king, ruling over a peaceful Middle-earth while Gollum catches the ring at the very end before falling with it into Mount Doom, but let’s keep the details aside. It is crazy to think that the film adaptation of this epic saga is already 20+ years old.
I will keep this one short since I have included Adobe multiple times before. The only thing that changes is the price. Some argue that Adobe is obsolete in a world full of AI tools. I do agree that some people will cancel their Photoshop subscription and use one of the many cheap AI tools out there. I don’t see, however, that Adobe loses too many accounts anytime soon.
I am very much looking forward to the next Adobe earnings and hearing more from management about how they see the market. The next earnings call is on the 12th of March, so mark it in bright yellow in your calendar and join me in looking forward to the numbers.
In terms of valuation, Adobe is reaching a silly one. The last time Adobe saw a drawdown as large as the current one was at the height of the great financial crisis in 2009. That is 17 years ago, and it tells you a lot.
The P/E is down to 16, and the EPS is expected to grow at 10-15% for the next few years.
And so is the EV/FCF ratio with 11.2. That is hilariously low. Even when you adjust for SBC, the EV/(FCF-SBC) is at 13.9.
In summary: Adobe is dirt cheap, and if it keeps posting consistently good results, the current prices are an absolute steal.
Salesforce
Salesforce is very much the same as Adobe. Nobody will just replace the definitive market leader in CRM with an AI-coded tool. Salesforce is deeply integrated into the systems of the customers and will stay exactly there.
Learn more about Salesforce in my deep dive, which you will find here:
There might be some pressure from the current seat-based licensing model, and we have to see how well the agents from Salesforce are being adopted by the customers.
Just like Adobe, Intuit, and many other fantastic SaaS companies, the price only knows one direction. DOWN! This, in turn, can be a fantastic opportunity for us.
The EV/FCF is at the lowest point in the last 10 years and is sitting at just 14.1. Adjusted for SBC, the EV/(FCF-SBC) is at 18.3, which is also perfectly fine. The EV/Net income is at 25.
Constellation Software
This is a company I have been following for a long time and never found the right entry point. This Canadian powerhouse focuses on buying small to medium-sized vertical software companies that dominate their niche. The entire business model is based on takeovers, and the current fear is that Constellatio’s software products will be redundant and replaced by AI tools. On top of that, the long-term founder and CEO, Mark Leonard (who is a wizard, based on his looks) stepped down for health reasons.
The stock price knew all the last years only one direction, and despite the current drawdown of more than 50%, the shares climbed with a CAGR of 18.4% in the last ten years. This is unbelievable. If you find a stock with such a stellar and steady price increase and it suddenly drops this hard, there are just three options:
The company turned out to be a fraud
The business model became obsolete overnight
The market overreacts, and this is a fantastic chance to buy said company
You can guess towards which answer I am leaning.
Constellation cannot be properly valued on a P/E basis because of all the takeovers. Based on the EV/FCF level, Constellation looks very promising.
I am working on a deep dive on Constellation, so stay tuned.
One more buy and two sales
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