50% Crash CSU, ADBE, HRB, SAP! BUY NOW?

Analysis of Recent Software Stock Crash & Potential Opportunities

Key Concepts:

• SaaS (Software as a Service): A software distribution model where applications are hosted by a provider and made available to customers over the internet.
• Owner’s Earnings: The true economic profit available to the owners of a business after all expenses, including the cost of maintaining capital assets, are deducted.
• Goodwill: An intangible asset arising when one company acquires another for a premium value.
• P/E Ratio (Price-to-Earnings Ratio): A valuation ratio of a company’s stock price to its earnings per share.
• Margin of Safety: The difference between the intrinsic value of an asset and its market price, providing a buffer against errors in valuation or unforeseen events.
• AI Disruption: The potential for Artificial Intelligence to fundamentally alter business models and competitive landscapes.
• Cloud Backlog: The total value of contracted cloud services that have not yet been recognized as revenue.

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I. Overview of the Software Sector Crash

The speaker addresses the recent significant downturn in software stocks, referencing a “trillion dollar tech wipeout” and the decline of the iShares Tech Software Sector ETF (down 22% year-to-date). He frames this as a potential opportunity for value investors, but emphasizes a cautious approach. The primary driver of this crash is perceived as the hype surrounding Artificial Intelligence (AI) and the potential for rapid disruption. He notes that the speed of change is accelerating, exceeding even the impact of the internet. The speaker positions himself as a “value investing idiot” who focuses on identifying opportunities where value is “slapping you in the face,” meaning clearly visible and undervalued.

II. Analysis of Specific Companies

A. Constellation Software:

• Current Situation: Down 50% recently.
• Financials: Appears superficially strong with smooth profit growth.
• Concerns: The speaker highlights a lack of true owner’s earnings. Constellation’s growth is primarily driven by acquisitions, leading to increases in intangibles, goodwill, and debt. There is a constant need for reinvestment without generating substantial cash flow for owners. He argues the valuation is based on continued growth through acquisition, not inherent profitability.
• New CEO & Strategy: The speaker believes the new CEO will likely continue the existing acquisition-focused strategy, requiring further investment and potentially diluting shareholder value.

B. Adobe:

• Current Situation: Down 50% over the last five years.
• Performance: Growth is slowing (from 30-40% to 10%), but remains positive.
• Valuation Sensitivity: The stock price is highly sensitive to growth rate expectations. A 15% growth rate could push the stock up 50%, while a 7% rate could send it down 30%.
• Competitive Pressure: Adobe faces competition and will need to spend to maintain its position, impacting profitability.

C. H&R Block (HRB):

• Current Situation: Down significantly, with a P/E ratio of 7 and a 5% dividend yield.
• Strengths: Returns more capital to shareholders than its current market capitalization (through buybacks). Dominant position in tax preparation services.
• Disruption Risk: The speaker acknowledges the significant risk of disruption from AI-powered tax preparation services (like Google potentially offering similar guarantees). The market is pricing in this risk, hence the low P/E ratio.
• AI Assessment: Utilizing Gemini (an AI assistant), the speaker confirms AI could offer low-cost, subscription-based tax preparation, potentially eroding H&R Block’s high service fees.
• Diversification Strategy: Suggests a diversified strategy might allow for a small investment, acknowledging the inherent risk.

D. SAP:

• Current Situation: Stock declined despite cloud revenue growth.
• AI Impact: AI implementation (SAP Business AI) is saving time for consultants and HR professionals (25% of weekly working time saved per consultant, 12 hours per HR).
• Paradoxical Effect of AI: While AI improves efficiency, it also potentially reduces the need for personnel, impacting future revenue.
• Valuation Concerns: Despite positive cash flow (8 billion on a 200 billion market cap – 4%), the stock is down due to a cloud backlog miss and disappointing 2026 guidance. The P/E ratio remains high at 30, indicating uncertain growth.

III. Value Investing Principles & Margin of Safety

The speaker emphasizes the importance of a “margin of safety” in value investing – the difference between a company’s intrinsic value and its market price. He argues that the companies discussed lack this margin of safety, making them vulnerable to unforeseen events. He contrasts this with his preferred investment approach, seeking opportunities where value is readily apparent. He stresses that a good business should be like a “strong castle with a deep moat” – difficult to disrupt.

IV. The Role of AI in Disruption

The speaker repeatedly highlights AI as a major disruptive force. He believes analysts are too focused on specific AI product launches (like Antropic plugins) and not enough on the broader implications of AI’s capabilities. He predicts AI will automate tasks currently performed by professionals, impacting revenue for companies like SAP and potentially disrupting entire industries like tax preparation (H&R Block). He emphasizes that AI’s impact will be felt across various sectors, not just technology.

V. Conclusion & Key Takeaways

The speaker concludes that while some of these software stocks may appear cheaper, they lack a sufficient margin of safety due to the looming threat of AI disruption and uncertain growth prospects. He advocates for a cautious approach, emphasizing the need for demonstrable value and a strong competitive advantage. He reiterates his preference for investments where value is “slapping you in the face” and warns against relying on optimistic growth projections in a rapidly changing technological landscape. He directs viewers to a link in the description for further information on his value investing methodology.