The Software Stock Bottom is IN: Is it TOO LATE to Buy?

reminder, coupon code Jhole expires today. But folks, we've got to talk about the software bottom. This is finally happening. Literally across the headlines, Wall Street learns to love software again. The headline is, "Forget the SAS apocalypse, it's a SAS renaissance." Socience anyone? Anyway, finally we are getting the bottom in software. If if you've been around this channel for the last like 6 months, we have been calling for a software bottom in Q3 and Q4 specifically after what we called the SpaceX sucking, which is them sucking money out of the economy and recycling it into Nvidia. Top of funnel, right? software has gotten so cheap that there was a point where Salesforce stock, which we have exposure to, we sent a buy alert out on Salesforce specifically when it was about $165 because it had about a 13% free cash flow yield. And Mark Beni off literally raised $26 billion of debt to buy back $25 billion of stock at about $191. So we looked at that setup and we're like this thing's trading for like a 0.9 peg. Uh that's a price to earnings growth ratio. We can buy it at 165 for less than what the CEO just bought it back for. And even though the bottom's not in yet, when it comes, it'll probably be pretty aggressive given how cheap the valuation is. And so Salesforce is just an example of that bottoming happening in software. But it's not just Salesforce that skyrocketed. I mean, you can see when we bought at around 165 in this lower range over here, it fell more. It fell down to 146. But we since the the third quarter roughly the third quarter which started right here in July since the third quarter we had this almost perfect rise in not just Salesforce but another one that we own of exposure to which is Palunteer. We got about at about 118 sent an alert for that. Palanteer's exploded here in the third quarter but you're now seeing software expand. You're seeing a recovery in Atlassian. You're seeing a recovery in UiPath. You're seeing a recovery in Service Now, a little bit of a recovery in Workday, though not as much. Uh, sorry, that was Monday.com. Workday is recovering. Axon has bottomed. Uh, and even QuickBooks into it, you know, it's trying to get out of there, though. That's one of the ones that's lagging a little bit. It still has recovered most of its pain from earnings. So, what's going on? Like, is it is the software bottom over? And is it too late to get into software? And what's software doing to try to minimize some of the expenses that are going frankly into software? See tokens we know because when you look at margins for companies whether it's at Salesforce or at UiPath or at Palunteer tokens are increasingly costing these software companies money as they integrate tokens into the services that they're offering. But there's some really cool things happening with tokconomics that if you don't know about uh well you're going to want to know about them. First let's take a quick look before we mention this tokconomics change. Let's take a quick look at a potential valuation even still from here because I uh for Salesforce and Palunteer uh or even UiPath because I know a lot of people are asking well Kevin like why do I care you know if I miss the boat and the software bottom's already happened is it too late in my opinion the answer to that is no. Uh and so if I look at our stock data tab I've got UIP path at 32 bucks 75% upside from here. Honestly, I think this is probably closer to 40 to 45 bucks. I've got Salesforce with a fair value of 458, which is still a double from here. We'll go through some Salesforce numbers in a moment, and I'll show you the the positive, the green shoots, and I'll show you some of the red flags. Uh, and then we've got Palanteer, which I also think is probably at I think we're running this at like a 25 peg right now, which brings it to about a 222 fair value. Honestly, think that's about 20 to 30% too low. So, I think there's closer to 50% upside on Palunteer. And this is one of the tools that we're still building and improving. It's a tool we've only had out for a couple months now. We're really excited about it. But beyond that, let's focus on what's going on with this innovation in tokens. And it all comes down to what's being called the harness effect. And it really relates to how software companies can not only make money, but how they can make more money. And of course, we love nothing more than doing our best to put analysis together and make money. Which is why not only should you subscribe, but you should take advantage of the coupon code Jhole expiring today. Get all nine courses, every private live stream, every alpha uh report, and every trade alert. Tax professionals say this could be a tax writeoff. And of course, what a lot of people are doing as well who are already course members, although some new folks are also bundling both of these together. What a lot of people are doing right now is they are bundling together homes AI with this. This is our proprietary artificial intelligence. Gets better every single month. We've got lots of updates coming for this, but we are removing the lifetime access for this, which means if you lock it in today, you'll keep lifetime access, but anybody else in the future won't be able to sign up for lifetime access anymore. So, you could bundle these together if you're new. If you're already a course member, you could email us at staff@meke.com. We'll give you a special bundle code so you could bundle this in and make sure you maintain that lifetime access for life. Okay, with that, let's get into this uh talk about the harness effect. So, Visa basically according to the information spent 3 months and 100 engineers slapping together a harness so that they could have what they call the Visa vulnerability agentic harness. And it basically coordinates between using anthropic or open AI or openw weight models and reduces the mess that models make with hallucinations. Gives more access to tools and data and reduces the time for software to actually adapt to situations. How does this work? Well, let's go to the study and go to a little bit color on what they say here. So, first of all, think about uh I somebody in our our live stream chat had a great analogy for this. They said, "Think about a harness as sort of like making a to-do list for your AI." Uh, and so what these harnesses do is they clean up the context. They put the right stuff into the right models. They bring in and enable tools that you could pull data from and use whether they're stored workflows or API access, database access, Salesforce access, or whatever. They orchestrate that all for you to where you kind of become model agnostic. You become results driven. That's a huge benefit for software companies because then they can bring token costs down while still providing equivalent value for their customers. And this is actually very very interesting. Take a look at this. Uh, and sorry, I'm getting a little distracted here. Peel, that doesn't sound good. Uh, good luck and stay safe out there. You're in the Coast Guard, I see. And you got a call from the super superiors to get a go bag ready with my documents. Unsubstantiated threat in California. Uh, oh, they're coming for Gavin. Anyway, sorry. Uh, focusing on this here. This piece right here. stay safe. This piece right here tells us uh this this study from July, this study from July tells us the following that when you use an orchestration layer, so one of these harnesses, basically when you use one of these harnesses, you end up being able to drive costs down 40%. Your time to action down 44%, though this is really seconds, so nominally for a human it doesn't make much of a difference. And your token usage goes down 38%. Now, why does this matter for the bottoming of the software? And you could kind of pause the screen here and actually look at the core of it right here if you want. I've highlighted it for you. But why does this matter for software? Well, it matters a lot for software. Because if software companies are seeing their margin affected uh by token costs, in other words, like let's say a UiPath is like, "Hey, we're we're integrating into our RPA uh robotic process automation. we're integrating tokens and we're going to start charging customers for tokens. Best case scenario, the overall bill for the software looks lower if you can provide them cheaper tokens. This is true at Palanteer. This is true at Salesforce. This is going to be true at UiPath, whatever. Uh it's also true for companies like in it who run artificial intelligence for their customer support. And if they can provide that customer service with cheaper tokens with equivalent quality, then that's key. In fact, that's what they make the argument here. Quality par, they actually say quality holds at par for task completion. And because token costs are down, overall quality per dollar rises 82%. You have to ask yourself, who wins from this? And this is why I'm bringing out the whiteboard. Who wins? If you use an orchestration layer, does the token provider win? Does the infrastructure layer uh like um you know the NBIS or the Neocloud or whatever do they win? All right. Or does the software company and ultimately the customer win right who wins when you get token cost down and quality per dollar up 82%. Well, it's not the infrastructure plays and it's not the token providers. They're actually getting their margin squeezed because you are now in the background commoditizing tokens. Who wins? Are the software companies providing value for now and the customers win which the customers could be other businesses, other corporations that are winning from those cost savings. Okay, fine. That all makes logical sense. So, is it too late to buy software? And is everybody definitely going to win in software? No, not everybody's going to win. A company that Salesforce integrates with, Lorraa, they seem to be a great winner. They have basically their GPT platform that organizes documents for cases and they're crushing it with annual recurring revenue. They went from a hundred million or $1 million of annual recurring revenue to now hundred million of recurring revenue. It's insane. Like there's so much annual recurring revenue money potential out there which is exactly why we're getting rid of the lifetime access on homes AI. It's like let's turn this into ARR being very transparent here because obviously we want to in the future hopefully IPO the startup AR is good for that anyway. So what does this mean for all software companies? It's still picking and choosing. See notion for example the information has this piece about how notion is making this all in bed on AI but the problem is sensor tower is reporting that it's mobile app use is just falling which suggests is AI replacing notion or can AI actually enhance what the company is doing and this is where it sort of depends on a company by company basis and it's a little complicated and problematic potentially So not not so clear. So if we now jump into uh let's go to Salesforce's documents, we could get a little bit of color about where the red flags sit. So and keep in mind we own Salesforce. We're exposed to Salesforce, exposed to Palunteer. Like we're up on these. We're really excited about them. We've been studying these software plays for months with our course members. And I do have obviously an upside bias on these, but I want to be clear. I'm also going to be critical. So that's why I'm going to start with some of the red flags here. So take a look at this. If we jump into a red flag over here, we can see that Salesforce is telling us that their primary increase in revenue came from new business, which includes not only new customers, but also additional subscriptions from existing customers. that pricing was not a significant driver for revenues. Now, that could cut both ways. I could say we're going to hook people now and raise pre raise prices later, or we could argue that we didn't want to take pricing because we didn't want to get people to cancel and leave us. They didn't want the attrition. So, you don't take pricing and you just try to sell people more AI features without raising prices on the on the existing. That might be a sign of weaker pricing power. That is important. In addition to that, uh they say here there was a decrease in the spend for professional services. Uh which you could see right here about a 4% decline in professional services. Why? Because there was less demand for larger multi-year transformations. In my opinion, that's a red flag. That's a sign that what you're doing is you're basically taking this existing sponge and you're like, "We won't raise the prices because we don't want to lose them, but let's offer them more AI stuff and squeeze the sponge." And to me, that kind of aligns with this announcement that they made regarding Claw Force, that Claw Force runs Salesforce headlessly through Claude. So Claude gets direct governed access to data 360, Tableau, Slack, all your Salesforce crap without leaving the chat. I kind of call this the palunteering of your data. You have one layer that where you can interact with all this data and you get fed what you need when you need it. That's good cuz it's all in one place and then it reduces the lookup time for you actually trying to find data, update data, process data, and it lets you focus on making the decisions. Obviously, there's a limit for how many decisions you really need to make, but you know, to me, this is good. It makes you more efficient when you do need data to make those decisions. Okay, cool. So, what does that mean? Well, what it means is if you're not really growing, are you really justifying these massive moves up in price? Probably for now. It doesn't mean it's going to last forever. At some point, companies might end up sort of, you know, if you're operating through clawed force. Uh, you might end up just rebuilding the Salesforce stack, which is literally the reason all of these companies ended up selling off in the first place. Everybody thought people were just going to vibe code away the Salesforce and they won't need Salesforce anymore. Right now, that's not true. But those seeds of pain still exist. The good news is the company got really cheap and even though they barely beat the stock skyrocketed that operating margin came in at 34.1% versus 33.6%. That was a beat. But RPO RPO remaining performance obligations only grew 14% which was a slight miss. Subscriptions beat but only by 28 basis points. So forecast for Q3 also beat at 11.46 billion, but only a 35 basis point beat. So it's like these weren't really good earnings in terms of expectation versus reality. I think what happened is the reason we had these large candles is because these have gotten too cheap. They have gotten too oversold in the SAS apocalypse. So let's look at the valuation for the company. You know, what's a company like this actually worth? Well, let's look at the income statement. So, if we look at the income statement, we can actually see that gross margins compressed a bit. We went from gross margins at 80, this is this would be 83.1%. Once you minus one on it, 83.1% compression down to 81.4%. Gross margin declined. Therefore, revenues are only growing at 10.8% year-over-year. Stable, better than obviously shrinking, but their costs went up 18%. So, you have shrinking PP here. And again, I'm saying this like I have this tendency of being critical, like really critical of the things that I'm exposed to. I should just be the hypeman, right? But but I also want to look at the red flags because that's the reasonable thing to do. So you know when it's time to get out anyway, they're bringing 31% down to the net, which is really good. When you're bringing 31% down to the bottom line, $3.5 billion out of 11.3 billion, you deserve like a 2.6 peg. And so if we actually do the valuation on that add a 2.6 peg times 10.5% projected EPS growth over the next four years times their earnings per share projected January at the end of the year 1671. We get to a valuation of mid 400s and honestly it could probably reasonably hit the mid 400s and then just momentum boom past that. If you momentum boom past that that's when you a stop allocating and b maybe you set a trailing stop and it's time to get out. But like why get out now? It's you're so early in the process. This thing's this puppy's just starting to boom, right? That's true for many software plays, whether it's Atlassian. You our our course member live streams, we've done quite a quite a lot of analyses on uh on Atlassian, great balance sheet, uh great growth. You obviously you can't pick all of them to invest in. Like Service Now is another one. It's good. It's not my favorite. I preferred Salesforce over um Service Now. But does that mean I'm bearish Service Now? No, not really. Uh what about Team? Same thing. Not bearish it. Problem with Team is when you analyze Team, if you look at their historical margins, they're really bad and they're inflecting up uh on in the recent term. And hopefully that keeps going with artificial intelligence, but you have to watch for those red flags. So what other red flags do we see in uh these software companies? Well, let's take a look at it here. I wrote that underneath the Legora Reply Zero. Zero is a a platform for accountants, a finance platform, 5 million subscribers. Agent Force handles the customer support at scale. Legora uses Salesforce for audit trails and governance and compliance, blah blah blah. the underlying concern that these companies and in the future can still optimize and replace Salesforce exists and going you know headless to integrate into claude kind of suggests that those underlying issues aren't going to go away and if there's ever a recession you know that's going to be the time maybe that the companies are like all right it's time to optimize for costs you know where can we cut so if I go through here I look at the limiting factor few limiting factors One is obviously the the interface limiting factor we talked about earlier of like how many problems do you really need to solve? That's a limiting factor for AI. But another thing is at some point the growth from introducing artificial intelligence products slows as well. If we go back over here, I want you to see growth from AI is right here. It is growing right now faster than the core business. The core legacy business is right here. So, I'll highlight it in orange. Agent Force apps, Agent Force only grew 7.6% year-over-year. The headless and the data 360 AI stuff that grew 20%. So, you are getting more gains right now from selling those AI products to the existing customers. As long as that keeps growing, you could keep seeing this stock go up. That's my expectation. Once that growth starts slowing down, that becomes your bigger red flag. So that's the income statement. Uh that's where the income's coming from. If you look at the balance sheet, we do have long debt, $45 billion, mostly financed at about one and a half% greater than treasuries. That's your spread, your yield spread. And then about 25 billion was used to uh buy the dip on their own stock at about $191 per share. They have enough cash to pay their bills and their cash flow yield is still good. They are yielding about 7% right now. And even if this stock gets fully priced at about $450, it would still yield a 3.5% cash flow yield, which is way better than the 1-ish% that Palanteer yields or the less than 1% that uh CrowdStrike yields. So SAS recovery Q3 Q4 bottom. Yeah, it's definitely happening which is great and I'm really happy for that. I'm grateful for that. Can it keep going? Like is it too late to get into Palunteer or Salesforce? My opinion the answer to that is no. I think these guys can still go. But if you're going to get into those stocks, you have to look at them as they still have underlying red flags. some of the ones that you should pay attention to. Obviously, we've talked about here. Uh those are the ones that I'm paying attention to. You might have your own red flags that you look at. Uh and and that's how you can have an exposure to this while still being uh careful, if you will. It's still an investment, right? Don't get married to it. Uh so, obviously, if you haven't yet, join us for more fundamental analysis over at mekevin.com. And remember, this coupon code expires tonight. Uh and then we are also getting rid of the lifetime access for this. If you do have the lifetime access before tonight, uh you will keep the lifetime access for this. So even if it's not perfect in the county where you are now, the cool thing is with the lifetime access in, you know, 3 months as the app gets better, then uh you're you have it for life. You've already made your investment. You're good. Like you get those updates, which is cool uh and exciting. So join us at meetke.com for the alpha membership and meet reinvest.com for the homes AI app. Why not advertise these things that you told us here? I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. People love you. People look up to you. Kevin Praath there, financial analyst and YouTuber. Meet Kevin. Always great to get your take.