Most important take away

Enterprise software stocks have been cut in half (price-to-sales from ~6.5x to ~3.5x), trading at multi-year lows and well below market multiples for the first time in the sector’s history, yet this cheapness alone is not a buying signal for software investors who care about revenue growth. The key question over the next 3-4 quarters is whether contract renewal rates and retention hold up, which will determine if these iconic companies can innovate through the AI disruption or if their moats have permanently eroded.

Summary

Stocks and investments mentioned:

• ServiceNow - Iconic software company that reported 21% revenue growth with flawless numbers but still fell 10%. Eisman’s guest Rob Oliver (Baird software analyst) views it as a company that can make it through due to strong innovation and deep enterprise embeddedness.
• Salesforce (CRM) - Trading at 12x free cash flow, growing top line just under 10%. Recently did a $25B debt deal to buy back stock. The global leader in Salesforce automation software but facing existential questions about seat-based pricing in an AI world.
• Adobe - Trading at ~9x next-12-month free cash flow, a fraction of historical multiples. Previously a textbook example of a successful cloud transition.
• Tyler Technologies (TYL) - $14.5B market cap, number one provider of local municipal government software in the U.S. Oliver highlights it as a strong pick because vertical software serving government is the least likely to be disintermediated by AI. Deep moat with proprietary data and regulatory requirements.
• Verisign - Highlighted as a steady, predictable business with fixed pricing and the backbone of internet .com infrastructure. Notable for being the only company on Oliver’s coverage list that reports GAAP earnings (not adjusted).
• Microsoft - Down 25% this year alongside the software selloff. Referenced as a historical example of a company that flatlined for 8-9 years before innovating its way through under Satya Nadella with Azure and cloud.
• Gartner (IT) - Stock down ~60% from peak, a casualty of the same anti-software sentiment despite being the world’s biggest tech consulting firm.
• Private equity / private credit names (Apollo, Blue Owl, KKR) - 25-30% of direct lending books are estimated to be in software companies acquired between 2018-2022. Their stock charts mirror the software selloff. The private software companies reportedly have strong retention rates so far.

Actionable insights:

1. Do not try to catch the falling knife yet. Eisman explicitly says it is too early to buy the software group. The negative narrative has 4-5 bear cases stacked against it (lower software creation costs, reduced moats, fewer seats, less pricing power, and direct competition from OpenAI/Anthropic). Until contract renewal data over the next 3-4 quarters proves these fears wrong, the group remains uninvestable for most.
2. Watch renewal rates and NRR (net revenue retention) over the next 3-4 quarters. This is the single most important metric that will determine when institutional money returns. If retention holds, confidence rebuilds and the group becomes buyable.
3. Vertical software with proprietary data is best positioned. Companies like Tyler Technologies that serve specific end markets (government, insurance, healthcare) with deeply embedded, regulated, compliance-heavy software are the least likely to be disintermediated by AI. Their narrow moats are paradoxically stronger.
4. Stock-based compensation remains a red flag. Most software companies still report non-GAAP earnings that add back stock comp, overstating profitability. Investors should demand GAAP reporting. Average SBC is declining but still in the teens as a percentage of revenue for many companies.
5. The AI disruption cycle is very early. Oliver compares it to the Gartner Hype Cycle, suggesting we are near the “peak of inflated expectations” for AI fears. Software companies are not “potted plants” — they are actively innovating with AI, and the window of opportunity for incumbents is now.
6. Monitor insider buying. CEO and insider purchases at software companies have been minimal so far. Significant insider buying would be a meaningful signal but has not materialized.
7. Private credit exposure to software is a risk worth tracking. With 25-30% of direct lending books in PE-owned software companies, any deterioration in those businesses could cascade into private credit problems, affecting Apollo, Blue Owl, KKR, and similar firms.

Chapter Summaries

Introduction and sponsor reads - Eisman introduces the episode focused on software stocks, noting that if not for the war, software analyst Rob Oliver would be the most important person to talk to right now.

Why software was great for decades - Oliver explains that enterprise software companies built sticky systems of record with high barriers to entry, strong pricing power, and successful transitions from client-server to cloud. Change management is painful for enterprises, making these businesses extremely durable.

The bear case against software - Five major concerns: (1) AI has dramatically lowered the cost of creating software via “vibe coding,” (2) reduced moats as anyone can build software, (3) fewer seats as companies operate more efficiently with AI, (4) loss of pricing power when creation costs have plummeted, and (5) the risk that OpenAI and Anthropic could sell directly to enterprises and bypass traditional vendors.

What makes a great software company beyond code - Enterprise software requires FedRAMP certification, compliance, security, API connectivity, and regulated-industry expertise. These capabilities take years to build and represent real moats that AI-native startups cannot easily replicate.

Two-year outlook and winners vs. losers - Oliver argues we are still very early in the AI disruption cycle. Vertical software companies like Tyler Technologies are best positioned. Horizontal vendors like ServiceNow and Salesforce can survive if they innovate on agentic solutions. The Gartner Hype Cycle suggests we are near peak fear.

Private equity and private credit exposure - An estimated 25-30% of direct lending is in PE-owned software companies (e.g., Citrix). These are mostly durable enterprise businesses with sticky customer bases. Fundamentals reportedly remain solid, but public market comparables have collapsed, meaning private valuations are likely lower too.

Valuation compression and investor psychology - Average price-to-sales has gone from 6.5x to 3.5x. Adobe trades at 9x FCF, Salesforce at 12x FCF — both well below market multiples. However, low valuation has never been a reason to buy software stocks; investors want revenue growth, not cheapness.

Stock-based compensation debate - Software companies heavily use SBC, inflating non-GAAP earnings. Investors are pushing for lower SBC, and companies are responding, but most still do not report clean GAAP numbers. Only Verisign on Oliver’s list reports GAAP.

Lessons learned (Eisman’s closing remarks) - Eisman concludes that catching falling knives in software is premature. Valuations being cut in half is not a buy signal for software investors. The group needs 3-4 more quarters of data on retention and renewal rates before a confident case can be made. Some companies will innovate through, but identifying them now is nearly impossible.