Playbook › Themes
Software & SaaS — all subsectors
Claim
Swept exhaustively during Act I of the 2026 rout ([[regime]]). A formal subsector
taxonomy exists at Output/Discovery/software-sector-taxonomy.md and should be the
starting point for any further work rather than a fresh scout pass.
Coverage by subsector
| Status | Subsectors |
|---|---|
| Well screened | ERP · CRM · HCM · Payments · Cybersecurity (network/endpoint) · IT Services · IT Distribution · Data Warehouse |
| Partially screened | Vertical SaaS (healthcare) · DevOps · Identity · Observability · AdTech · Automation · MarTech · iPaaS · Low-code · GRC/Compliance · Communication platforms |
| Never screened | GovTech · Capital-Markets software · Contact Center · Construction · E-commerce · Simulation · Data Integration · Automotive software |
The "never screened" row is the actionable part of this note — it's where a software screen should go, not back over the well-screened rows.
What surfaced repeatedly
- Deep value tier (March): ADBE 9.3x fwd, WDAY 10.7x — the two highest-conviction names across the whole series.
- AI-headwind dividend tier: ADP, PAYX, OTEX, BR, SSNC — moats being punished for AI exposure while paying you to wait.
- AI-tailwind tier: CTSH, DOX, GEN, NTAP — "legacy" labels on businesses AI was quietly helping.
- Vertical / niche: SPSC (EDI network effects, 64% off high), BLKB (nonprofit monopoly, 7.5x), QTWO, QLYS (zero debt, 33% op margins), MANH (zero debt, 29% FCF growth, 44% off high).
- July refresh found the field largely picked over — ALRM and IRDM the only names of interest, and "everything smaller that surfaced trades cheap for a reason."
Rejected, with reasons worth keeping
| Name | Why |
|---|---|
| ZS | GAAP-unprofitable at 34x P/FCF |
| HUBS | Huge drawdown but SBC-adjusted earnings ≈ zero |
| VEEV | Great moat, 28x P/FCF — not deep value |
| MDB | Best developer moat in data infra, but SBC exceeds FCF |
| PD | Value trap — decelerating growth, extreme SBC, buyback funded unsustainably |
| PLTR | 83x fwd — never in the value universe |
SBC-versus-FCF was the single most common disqualifier. In this field the headline multiple is routinely misleading and the SBC adjustment is the real screen.
🚩 The unread lesson
Not one of these screens has been checked against what happened next. The March
thesis — that AI-displacement fear was indiscriminate and moated names were mispriced —
is testable now with four months of hindsight, and testing it would score the method,
not just the names. This is the highest-value unrun analysis in the repo. Until it's
run, treat the March conclusions as untested hypotheses, which is why confidence here
is medium despite the volume of work behind it.
First data point on the retrospective — ADBE, scored 2026-08-04
The March cohort's joint-highest-conviction name (9.3x fwd) is the first to be re-underwritten against real results. The verdict is split, and the split is the lesson.
| The March thesis said | What actually happened |
|---|---|
| The sell-off is indiscriminate AI fear, not a business problem | ✅ Half right. Q2 FY26 beat on both lines (+13% rev, +18% EPS); FY26 guidance raised twice above street; the FTC overhang closed |
| A moated compounder is mispriced at 9.3x | 🔻 Half wrong. Adobe voluntarily guided FY26 ARR growth down to 10.2% from a 12.5% exit rate, ~half of it from deferring Creative Cloud price increases |
| Price would re-rate as the fear passed | ⚠️ It de-rated further, then partially recovered. $190 low, now $253.81; the multiple never came back |
The mechanism the March screens could not see: a cheap multiple on a business that is about to stop taking price is not the same asset as a cheap multiple on one that will keep taking it. Adobe told the market it could not raise prices on its flagship — and that is a disclosure no screen reads, because it lives in guidance commentary, not in a ratio.
What this scores about the method, not the name:
- The screens measured the drawdown correctly and the mispricing only partly — which is the specific failure [[principle-down-a-lot-is-not-cheap]] warns about, arriving here in its subtler form. ADBE genuinely was below its own band. It was still not worth what the screen implied, because the earnings trajectory changed after the screen ran.
- The SBC filter held up well. ADBE passed it in March (SBC 19.7% of FCF and falling) and still passes. That filter is the most durable thing the March series produced.
- What the screens had no column for was pricing power. Every name in the deep-value tier was scored on multiple, margin and SBC. None was scored on "will this company still be able to raise prices in 18 months?" — which turned out to be the variable that mattered.
Consequence for the open retrospective: run it, but score each name on whether the
earnings trajectory held, not on price. Price alone will credit the March screens for the
sector rebound and blame them for the sector's de-rating, and neither is information about the
method. See Output/Stocks/Technology/ADBE/analyze-2026-08-04.md (conviction 7.5 → 6.5, fair
value $380-460 → $290-360, moat 7.5 → 6.0).
One name is not a retrospective. Confidence stays medium.
Second data point — TEAM, scored 2026-08-07. It resolves the opposite way, and the diagnostic holds.
Atlassian was an Act I casualty of the same rout ($184.00 → $56.01, −70%), analyzed at $71.55 on 2026-04-26. Its Q4 FY26 print on 2026-08-06 sent it +38.9% in a single session to $153.04 — +173% off the low.
| The March 2026 thesis said | ADBE (8/04) | TEAM (8/07) |
|---|---|---|
| Sell-off is indiscriminate AI fear, not a business problem | ✅ half right | ✅ confirmed — Cloud accelerated 26→26→29→31% straight through the fear |
| A moated compounder is mispriced | 🔻 falsified — ARR guided down on deferred price rises | ✅ held — Data Center prices raised 15% in Feb 2026, strong retention still guided |
| Price re-rates as the fear passes | ⚠️ de-rated further, partial recovery | ✅ +173% in ~3.5 months |
The discriminating variable is the same in both cases, and it is not the multiple — it is whether the company can still take price. ADBE could not and its cheap multiple was a trap; TEAM could and its cheap multiple was real. The diagnostic is now two-for-two; the outcome is one-for-two. That is the most useful thing the retrospective has produced, and it is a column none of the twelve screens had.
What TEAM adds that ADBE did not — the SBC filter needs a second question. The March
series' most durable output was SBC ÷ FCF. TEAM passes the direction test (SBC/revenue
26.1% → 24.4%, guided to ~19%) while failing the level test badly (SBC-adjusted FCF
−$288M, SBC/FCF 122%). And the guided improvement turns out to be a compensation-mix
swap that is mathematically neutral on owner earnings —
see [[pattern-equity-for-cash-comp-swap-is-owner-earnings-neutral]].
So the filter should be run as two questions, not one: (1) is SBC falling, and (2) is total compensation cost falling? The March screens only ever asked the first. From 2026 onward, with SBC discipline a stated priority across the field, the answer to (2) will often be no while (1) reads as a win.
A verdict caveat worth recording: TEAM came out HOLD at $153, not BUY. The thesis was right and the position should not be added to — roughly 90% of its growth-adjusted discount to its own history closed in one session. A validated screen thesis and a current buy are different findings, and the retrospective should score the first without implying the second.
Third and fourth data points — MNDY and PEGA, scored 2026-08-10. The diagnostic is 4-for-4, and PEGA forces a refinement.
Both analyzed in one session. MNDY is the cleanest confirmation yet; PEGA is the first case that passes the test and misses anyway — which is the more useful of the two.
| ADBE (8/04) | TEAM (8/07) | MNDY (8/10) | PEGA (8/10) | |
|---|---|---|---|---|
| Can it still take price? | ❌ deferred CC increases | ✅ DC +15% Feb-26 | ❌ lap expiring, none taken | ✅ case-price uplift Jun-26 |
| Pricing model | per-seat | per-seat/tier | per-seat | per-CASE |
| Outcome | de-rated further | +173% off low | growth cliff 22%→16% | ACV +17%→+7%, sequentially negative |
| Diagnostic verdict | correct | correct | correct | correct signal, wrong outcome |
MNDY — the diagnostic's cleanest hit, because management stated it outright
ADBE's failure had to be inferred from a guide-down. MNDY's was said on the record, with a date and a magnitude. CFO Eliran Glazer, Q1 FY26 call, 2026-05-11:
"we are lapping the pricing actions from 2024… they increased our NDR by 12%. We're going to lap this at the end of Q2. And we don't believe that expansion or new adoption will now be enough to offset some of the pricing growth that we have seen in the past."
One broad increase (Jan-2024, +11–21% list), ~12 points of NDR harvested from it, no replacement taken on the core product, and the guide cliffs 24% → 22% → 16% in the exact quarter the lap completes. A single price action can carry a growth rate for two years and then hand it back in one quarter — and the screen sees only "20% grower at 2x revenue" right up to the handover.
Corollary worth keeping: the AI replacement revenue is lower-margin than the seat revenue it replaces. MNDY's credits carry compute COGS; gross margin is guided 90% → mid-80s. A per-seat vendor pivoting to consumption is not swapping like for like.
🔍 PEGA — a company can pass the pricing test and still miss. The constraint was volume.
PEGA bills per case (a completed workflow), not per seat — Trefler: "tying our economics directly to the business value delivered rather than to users or seats." In June 2026 it raised prices via a case-price uplift for AI runtime while absorbing token costs. That is the TEAM pattern exactly, and the per-case meter is structurally immune to the seat-compression thesis: if agents replace humans, the cases still get processed.
And ACV growth halved anyway — +17% → +12% → +7%, with total ACV going sequentially negative ($1,622M → $1,620M). CFO Stillwell named the cause and it was not price: "we didn't execute well enough on our go-to-market change."
The refinement: the diagnostic tests the PRICE term of
revenue = price × volume. It is silent on the volume term. ADBE, TEAM and MNDY were all cases where price was the binding constraint, so the test looked complete. PEGA is the case where price was fine and volume and sales execution broke. A pass is necessary, not sufficient. From now on the test must be run as two questions: (1) can they still take price? (2) is unit volume — seats, cases, customers, workloads — still growing? A name that passes (1) and fails (2) will look like a value opportunity on every ratio and still de-rate.
This is the same shape as the SBC refinement TEAM forced (one question became two). Both refinements came from a name that half-passed.
The pricing-model taxonomy this produces
Worth carrying into any software screen, because it is not visible in a ratio:
| Meter | Exposure to agentic AI | Names |
|---|---|---|
| Per-seat | 🔴 Direct — revenue base shrinks with headcount | MNDY, TEAM, ASAN, most 2021 cohort |
| Per-case / per-workflow | 🟢 Inverted — agent volume is accretive | PEGA |
| Consumption / token | 🟡 Neutral on volume, dilutive on margin (compute COGS) | the direction everyone is moving |
The screens never had a column for the pricing meter. They should.
What would falsify this
The retrospective showing the March picks tracked the sector rather than beating it — which would mean the screens were measuring the drawdown, not the mispricing, exactly the error [[principle-down-a-lot-is-not-cheap]] warns about.
Related
[[regime]] · [[pattern-value-depth-varies-by-software-layer]] · [[pitfall-not-investable-universe]]
History
- 2026-03-18 → 2026-04-28 — twelve screens across Act I.
- 2026-07-13 — refresh found the field picked over.
- 2026-07-30 — consolidated; the missing retrospective flagged as the open item.
- 2026-08-04 — first retrospective data point. ADBE (the cohort's top pick) re-underwritten: the beat-and-raise validated the "indiscriminate fear" half of the thesis, but a deliberate ARR guide-down on deferred price increases falsified the "mispriced compounder" half. Conviction cut 7.5 → 6.5. INTU analyzed for the first time and added to the roster — it was never swept despite 12+ software screens, because it was inside the portfolio the whole time.
- 2026-08-07 — second retrospective data point, and it resolves opposite to the first. TEAM re-underwritten after a +38.9% single-session move on its Q4 FY26 print. The "indiscriminate fear" half was confirmed and the "mispriced compounder" half held — because Atlassian could still take price (DC +15% in Feb 2026) where Adobe could not. The pricing-power diagnostic is now 2-for-2 and is the retrospective's real output. Also established that the SBC filter must ask two questions, not one — TEAM passes on direction and fails on level, and its guided SBC cut is a currency swap ([[pattern-equity-for-cash-comp-swap-is-owner-earnings-neutral]]). Verdict was HOLD, not BUY: a validated screen thesis is not a current buy.
- 2026-08-10 — third and fourth data points, MNDY and PEGA, in one session. The diagnostic is
4-for-4 and now has a second question. MNDY failed it with a management quote naming both the
magnitude (~12 points of NDR) and the expiry date (end of Q2 2026) — the cleanest confirmation
recorded, and the growth cliff (24→22→16%) lands exactly on schedule. PEGA passed it —
per-case pricing, a June-2026 price uplift, structurally immune to seat compression — and missed
anyway, with ACV going +17%→+7% and sequentially negative on a self-admitted go-to-market
failure. That forces the refinement: the test covers the PRICE term only, and must be paired
with a volume question. Also produced the pricing-meter taxonomy (per-seat / per-case /
consumption) that none of the twelve screens had a column for. Both verdicts were WATCH
(PEGA 5.5, MNDY 4.5) — neither cleared on price. Confidence stays
medium: four scored names is still not the retrospective.