Software Feedback From The Frontline, ECB Hikes Rates, Leisurewear Begins To Rebound, New Trading Postion
Diversity Of Performance In Software
I had an insightful conversation with one of my tennis buddies last night.
He owns a software company that sells to the hotel and restaurant sector.
I was very interested to hear that business is doing very well.
His most senior developer began to really get into using Claude Code about seven months ago. He is now 4X more productive.
He said that he has not been under pressure to hire more developers, but his headcount has been stable.
At the same time, they have been able to push out several updates and enhancements in the last six months that would previously have taken years.
He also said that the hotel and restaurant sector is expanding and demand is increasing, which is also very positive.
This sounds like the most benign possible outcome from the AI buildout. Small companies see improving margins, and have greater security from their customers, because they are providing better service at a lower cost.
So, why is the stock market’s software sector in so much distress?
Predictability just took a hit.
Markets are forward-looking. They take what is predictable and project into the future. Then debt is layered on to accelerate growth. This works wonderfully as long as the cashflows remain predictable and profits continue to expand.
The challenge for very large software companies is their customers now have a clear incentive to build their own internal software.
A large company can save money by having an internal team develop custom products. They end up with a suite of products ideally suited to their needs for a lower cost.
This is a much bigger threat for big software companies than smaller ones. If your customer is spending tens of millions of dollars on your software, they have an incentive to do it themselves.
If what you charge your customer is insignificant relative to their wider business, you now have a more convincing moat.
There are several outcomes worth considering from this change in the market environment.
Software engineers are going to find jobs with their customers more than software companies.
The largest companies are at the most risk and under the most pressure. This is a Kodak moment for the sector.
Kodak’s business was selling film for cameras. The company even invented the digital camera but did not fully comprehend the risk.
This is one of the biggest case studies of corporate failure and it has been absorbed by Silicon Valley.
This explains why the most successful companies are willing to bet everything on the next big thing because the alternative is inevitable obsolescence.
Oracle’s revenue impressed but the share declined today because the company expects to spend heavily on the AI buildout this year. They have no choice.
Oracle is a software company that got its start from database management. Everything it has built since then related back to that start. AI is an existential threat.
The question is not about how much they are spending, but that if they do not spend the company might disappear within the decade.
