Key insights
- The author questions the sustainability of software moats in the face of AI disruption. While companies like ServiceNow exhibit strong financials (high renewal rates, FCF), their stock prices are falling. Concerns include AI lowering barriers to entry, reducing seat count growth, weakening pricing power, and AI labs bypassing middleware. This creates uncertainty about whether current valuations reflect genuine distress or a buying opportunity.
ServiceNow reports 21% revenue growth, 97% renewal rates, expanding free cash flow. Stock falls 10%. That's the whole story in one line.
Wrote something this week trying to work through whether the AI disruption being priced into enterprise software is rational or overdone. The FCF yields on some of these names are 7 to 8% on businesses with 75%+ gross margins and sticky enterprise contracts. That's not a profile that usually trades at distress multiples.
The bear cases are real though. Vibe coding collapses barriers to entry, seat count growth stalls as AI makes headcount irrelevant, pricing power at renewal weakens, and the AI labs could go direct to enterprise and cut out the middleware entirely. All four of these are live simultaneously which is unusual.
Is this a falling knife or a slow-motion setup? What am I missing?
https://unhedgedshortconvexitykills.substack.com/p/the-software-moat-is-leaking-or-is