Bank of America recently released an in-depth Research Report on the Software Industry, focusing on the impact of macroeconomic uncertainty on software companies.
According to Zhitong Finance APP, Bank of America has recently released an in-depth research report on the Software Industry, focusing on the impact of macroeconomic uncertainty on software companies. The report reviews the fundamental performance of software companies under high macroeconomic uncertainty in 2022 and analyzes key indicators trends in different business models (Consumer, Subscription, and Diversified Bond) and end markets (Enterprise, SMB/Consumer, and Mixed Market), including revenue growth, billing growth, operating margin (OpM), and sales and marketing efficiency.
Risk sensitivity of different business models and market sectors.
The report conducts an in-depth analysis of the risk characteristics of software companies during economic downturns. Data from 2022 provides strong reference. That year, both revenue growth rates and billing growth rates of software companies declined. The report notes that while the macroeconomic environment is full of challenges, demand signals are not universally pessimistic but show a mixed trend.
Under the subscription model, since over 70% of revenue comes from traditional subscriptions, these companies have higher revenue visibility and demonstrate greater resilience. In contrast, the Consumer business model, where over 70% of income is tied to usage or transaction volumes, may face the risk of sharply declining revenue growth during macroeconomic slowdowns.
From the perspective of end markets, software companies focused on the enterprise market are relatively stable, as enterprise IT spending is more resilient. In contrast, software companies targeting SMBs and consumers may suffer more severe impacts during economic downturns. Diversified Bond companies lie somewhere in between, with their risk depending on the specific business composition.
Potential impact of tariffs on the software industry.
The research report particularly emphasizes the potential impact of tariff issues on the Software Industry. Direct risks are primarily concentrated in the E-Commerce Software sector. The U.S. government has announced tariffs of at least 10% on all countries and has removed the exemption rule for the minimum duty-free amounts for China and Hong Kong. This has put E-Commerce Software providers like Shopify (SHOP.US), Global-E Online (GLBE.US), and BigCommerce Holdings (BIGC.US) at a higher risk from tariffs.
Revenue risk exposure in geographical and industry verticals.
The report also provides the revenue risk exposure of software companies in different geographical regions and industry verticals. For example, certain software companies have a high revenue share in Europe, the Middle East, and Africa (EMEA) and may be more susceptible to local economic fluctuations and policy changes. In industry verticals such as Manufacturing and Retail Trade, software companies' revenues may also be affected by industry-specific economic fluctuations.
Stock valuations and investment recommendations.
Analysts at Bank of America have conducted a detailed analysis of the stock valuations in the Software Industry. The report indicates that the enterprise value (EV) of the Software Industry relative to the next twelve months' revenue (NTM Revenue) multiple has dropped to 5.0x, below the 5-year and 10-year median of 7-8x. This suggests that market expectations for the Software Industry have significantly decreased, but it may also indicate that current valuations are attractive.
The report also emphasizes the importance of (FCF) yield.free cash flow.About 15 software companies are expected to achieve an FCF yield of over 8% by 2026, providing potential value support for investors.
Conclusion and Outlook
The report from Bank of America provides investors with a comprehensive analysis of the Software Industry, covering multiple dimensions such as macroeconomics, policy changes, industry dynamics, and company fundamentals. The report reminds investors that in the current macroeconomic environment, investments in the Software Industry require more cautious and detailed analysis. Investors should closely monitor macroeconomic indicators, policy changes, and the financial health of companies in order to formulate reasonable investment strategies.
In terms of investment recommendations, the report suggests focusing on companies with high income visibility, strong free cash flow generation capabilities, and competitive advantages in the enterprise market during an economic downturn. At the same time, as the macroeconomy improves, investors can gradually increase their investments in software companies with greater exposure to Consumer and SMB markets.
Risk Warning
The report also clearly points out that the Software Industry faces a series of risks, including macroeconomic slowdown, policy changes, intensified competition, and technological transformations. Investors should fully consider these risk factors when making investment decisions and conduct reasonable asset allocation based on their own risk tolerance and investment objectives.
