EXCLUSIVE: How to identify software vendors that can stand the test of time


Nobody knows when the markets will rally, but with the majority of stocks well off their highs, it could be a good time to start investing money if you can spot the right opportunities.

Pierre OffringaFounder and Chief Analyst of Investment in the software stackoffered insights on how to identify opportunities in the software industry on Friday at the Fintwit 2022 conference hosted by Benzinga and Capital of Lupton.

“I don’t know when the replay will be, but I’m sure there will be,” Offringa said. “I think the key is that companies that show consistent growth over time will adapt to any type of change in the macro environment.”

Sustainable growth: Sustainable growth companies are those that consistently generate revenue over time while maintaining cash flow, Offringa said.

Durability is key, he said. The market expects growth to marginalize over time, so the opportunities lie in companies that can maintain long-term growth rates, he explained.

Offringa used a pickaxe and shovel analogy to compare the biggest gold rush winners to software companies. Those who made the most money during the gold rush were those who sold the tools to miners, he said. Choice and shovel software vendors are companies that provide the building blocks on which digital experiences are built.

“If we focus our attention on companies that provide the building blocks to enable these experiences, then it’s less critical that we anticipate consumer behavior,” Offringa said.

For instance, Datadog Inc. DDOG is a major service provider for Interactive Peloton Inc PTON and while Peloton has faced significant challenges over the past year, Datadog remains largely untouched as the company has many other customer experience companies that want to use its services, he said.

Other pick and shovel software vendors include Amazon.co.uk AMZN, Alphabet Inc. GOOG, Microsoft Corp. MSFT and Snowflake Inc SNOWhe noted.

Identification of opportunities: The top three factors that contribute to sustainable growth are addressable market size, publishing cadence and customer flywheel, Offringa said.

Sustainable growth companies are built on a broad addressable market base, he said. Release cadence refers to rapid innovation, he added.

Investors want to look for companies that frequently launch new products and seek to expand into adjacent product categories. It also helps expand a company’s total addressable market, Offringa said.

The customer flywheel factor is more simply a company’s ability to attract new customers and increase customer spending over time, he explained.

“But at the heart of that, of course, is a competitive gap. It’s critical that any of these companies…have a defensible gap. And why does that matter? Because it keeps new entrants out. in the market,” said Offringa. .

See Offringa’s full presentation below:

Photo: Pexels from Pixabay.


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