Moody
Equity Investor, Semiconductor Research
Vertical market software could become more valuable as AI agents need its permission, audit and human-control systems to operate safely. Municipal and hospital software already supplies those controls; more capable models increase the value of that layer rather than replace it. Constellation Software, Topicus and Sygnity stand to benefit if vendors open their systems to AI and build the controls themselves; otherwise another provider could take that role. x.comÂ
Vertical market software captures the same AI value shift as biotech, in a simpler and cheaper form. AI makes code cheaper and multiplies software, moving value up the chain, best seen in companies covering the whole chain such as Constellation Software and Topicus. As serial acquirers, their bottleneck is the supply of businesses to buy, and cheaper software plus AI fear make that pool bigger and cheaper. The effect is at least neutral and likely positive, yet the market prices them as losers. x.comÂ
Constellation Software and Topicus face little threat from AI-built software because end users stay with software they already know and trust. Constellation, as quoted by @TidefallCapital, notes that nurses sometimes quit when their nursing home is bought by an operator using competitor MatrixCare, because so much muscle memory is involved. x.comÂ
Large mission-critical software platforms such as Atlassian, Twilio, Salesforce, Workday, ServiceNow and SAP are being lifted by AI, not destroyed by it. Datadog hit an all-time high on AI after Atlassian and Twilio accelerated. They can charge external AI agents a toll to access their systems of record, volume set to grow 100x in 12-24 months; sell their own agents; and expand into areas like security. AI resembles web to mobile, a tailwind for the best companies, though not all SaaS is safe. … Show more
Topicus's prominent software examples look weak in the AI era, making Tyler Technologies' US government software preferable. Government software has staying power, but Tyler avoids the European exposure and currency risks. The durability of Topicus's software runway and its future valuation remain uncertain. x.com x.comÂ
Constellation Software and Topicus are being wrongly lumped in with AI software fears, setting them up to rerate back toward a 3% free cash flow yield once things clear. They adapt, execute and take advantage of deals, with record capital deployments, and moats in vertical market software are shifting rather than disappearing; much of software can adapt with the right culture. A post the author replies to counters that new competitors have beaten Harris and Tyler in govtech. x.com x.com x.comÂ
Horizontal SaaS tools such as HubSpot, Atlassian and Intuit will be disrupted as companies build their own replacements with AI. Per @CJ0pp3l, quoting one of Constellation Software's AI leads, HubSpot, Jira, Mailchimp and Zendesk have been replaced with AI-built systems and agents, and only vertical software with strong systems of record and deep workflow integration will grow with AI. The market also sold vertical names like Constellation and Topicus, which hold deep platform data. x.comÂ
Constellation Software has no way to benefit from AI and little organic growth, so 21x GAAP EBIT looks fair, with perhaps a downside skew if churn rises across its portfolio in the next five years. The market's negative reaction is rational. Its small vertical software businesses were run financially rather than for product, many still on-prem, with no central AI strategy as software gets cheaper to build. Organic growth was 2% in constant currency; inorganic growth is fundamentally different. … Show more
The 'SaaSpocalypse' narrative is wrong because AI makes replacing enterprise software more expensive, not cheaper, leaving beaten-down SaaS stocks at once-in-a-lifetime entry levels. Replicating ServiceNow would take some 40,000 engineers to match 20 years of code, and even AI coding would raise costs, since tokens are not free and model labs lack the capacity to be enterprises' database layer. LLMs are pattern recognizers that can fail catastrophically on new problems. x.com x.comÂ
Constellation Software is among the names currently liked. x.com x.com x.comÂ
Constellation Software's Sabre deal is one of the dumbest capital allocation decisions in years, enough to reverse a fresh view on the stock in under a month. Constellation should be buying smaller, solvent companies. x.com x.comÂ
Security, identity, observability and data governance are the less crowded side of the enterprise AI stack and should benefit as open models make AI cheaper. In multi-model setups, switching models gets easier, but rebuilding years of access controls, audit logs, proprietary data pipelines and internal workflows does not. Hardware remains scarce and critical, but names such as Palo Alto Networks, CrowdStrike, Fortinet, Okta, Datadog, NetApp and Snowflake sit around the model. x.comÂ
