1. Demand for Software is very strong and stable – Spend on software has grown at ~9% about a decade. Looking forward Gartner estimates show that the Software category is expected to grow 8-11% versus the US economy at 2-3% and broader technology spending at 3-4%. Software is a GOOD neighborhood to live in.
2. Signals from the Stock Market: “In the short term the market is a popularity contest; in the long term it is a weighing machine.” – Warren Buffett. Over many years, the market reflects the true substance of a business – here you can see that over the last 15 years, a broad basket of software companies has created meaningfully more value than a broad basket of businesses.
3. The Compounders: Now what if we pulled out the software companies that constantly buy other great software businesses the results are spectacular – FIVE times better than the S&P 500.
4. The best of the best: Who was the best? Constellation software is Canadian holding company that only buys niche small software applications They acquired boring, sticky software businesses and reinvested the cash those businesses generated into the next one. They do NOT get involved in day to day operations. 5 amazing facts about Constellation:
- Constellation turned 25M into $15Bn – without raising any more money and using ZERO debt. A $100,000 investment at the beginning would be worth $56 Million today
- The average customer across all the portfolio of companies uses the software for 20+years
- The CEO travels in economy – he is incredibly successful + 6’5” and 280 lbs. The tone is set from the top
- Constellation acquires 30 to 40 companies per year
- ROIC over 10+ years has been 30%
5. Six of the top 10 Private Equity Firms have a heavy focus on Software. Coincidence? probably not.
6. Well Run Software Companies are Extremely Profitable…. In fact, software is one of the Most profitable industries in the world. Here are average EBITDA Margins by industry + examples.