The Great Bifurcation In Software Is Upon Us. (The Cestrian Circle Newsletter).
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Read our full disclaimer, here.
Don’t Overthink It
by Alex King, CEO, Cestrian Capital Research, Inc.
This is a short and mercifully sweet note.
Software, as everyone knows, is being dumped. Microsoft and others are trading at multiples not seen since the depths of the 2022 bear market.
Heck some stock prices are back where they were in the inflationary rate-hiking miseryfest of 2022 and early 2023. Here’s $VEEV.
This won’t last.
What Do We Want? EPS Growth
Enterprise software companies are at a crossroads, and their CEOs and boards have two choices.
One, pretend that this AI fandango isn’t really a thing and that it too shall pass. This is called the Siebel Strategy after its founder, who decried that this cloud thing was just a fad. This strategy is dumb. Companies that pursue it will slowly atrophy, their stock prices will bleed out, and one day they will beg to be a division of Constellation Software or a building block for Vista Equity or Thoma Bravo.
Or two, choose violence.
This means: the CEO, with the full backing of the board, rolls their sleeves up and unleashes a team of autists to roam the halls for a spot of the restructuring consultant’s favorite game, the Zero Day Budget. As in, you see this here cup, do I need this cup? No? Then get rid of it. This “forward deployed engineer” (aka. guy working from home swears he’s at client sites most of the time, shame the little tracker doodah we put in his laptop bag doesn’t agree) … do we need him? No? Then get rid of him. This batch of devs doing … what is that … artisanal coding???? - as in, actually writing code - like with a quill or what? - do we nee - dammit OF COURSE WE DON’T NEED THEM GET RID OF THEM NOW. And so on. The natural conclusion of this is I believe we will see plenty of enterprise software companies able to grow revenues in excess of 20% p.a. at cashflow margins of 50% or better. (Pre Claude, 30% looked pretty good. Now? Try harder please).
The CEOs that choose this route will be saved. Fully 1/3 of their staff are doomed, but that’s how it is when the deflationary wrecking ball comes to town. Heck these devs being tossed on the trash heap were quick enough to get rid of all the manual processors in their customers’ staff, and now the circle of life has come around to their own.
Lose 1/3 of your staff, your cashflow margins moon obviously. Tokens are expensive but they’re cheaper than the wetware and they don’t do all that stuff at the staff offsites that needs HR and lawyers and so on.
Better, you don’t have to pay Anthropic with stock based comp, yet. So for every $1 in annual cash costs you cut, you get to cut another $0.30 - $3 in stock based comp. Now, grownups don’t care about stock based comp because it’s been a thing for so long and we all know it’s in the EV and no-one likes a dilution whiner. But there are a lot of dilution whiners out there. So the GAAP fiends will be super happy because EPS will climb faster than cashflow. I am already weary in anticipation of people dropping the ginormo 6th Edition of Securities Analysis on their desks with an I-told-you-so gleam in their inevitably bespectacled eye.
When Do We Want It? Q1 And On
The smartest CEOs in the room will play Q1 earnings like this:
- Here’s the numbers, which oh by the way are good
- Here’s the guidance, which we are hiking because (whispers it) we already sandbagged this boyo all the way to Kansas already and also because (loudly) we are cutting [insert number balanced between X, the level at which sellside analysts salivate, and Y, the level at which you get protests outside your office a la the newly-minted Oracle diaspora] of staff.
- We don’t anticipate any hit to revenue growth from this cut, because we have a bunch of angry devs who are on a mission to Claudemaxx their way to riches just to prove that their dumb Gen X or millenial boss was a loser stuck in the 2000s and wanted everything mapped out in Visio. Visio!!
- Thankyou for your attention to this matter
Since everyone thinks software is going to 0, any CEO with the chutzpah and just enough reality to pull this off is going to see a +10%, +20% earnings reaction on the print and beyond.
And in the end someone will write this note all over again but in a fawning style on a glossy page and in the past tense. Whereupon we can all sell our newly inflated software stocks because top.
Stay Tuned
We cover all the software stocks that matter. Read our earnings reports as they come out, as soon after the print as we can persuade Claude CoWork to just get the numbers dammit and stop trying to write irritating AI slop that anyone can see from a mile off.
TL : DR
- Top software CEOs will use AI tools to hollow out their workforces to deliver massive EPS and cashflow growth, into awful sector sentiment, transforming their stock prices to the moon.
- Refusenik CEOs will be fired by their boards right after they sell the company to a team of playbook ninjas for 5x EBITDA.
- Not all software stocks are the same. Choose wisely. Violence is good.
Cestrian Capital Research, Inc - 9 April 2026
Get our almost-free entry level service here.
