“If you find yourself in a fair fight, you didn’t plan your mission properly”
– Colonel David Hackworth (U.S.Army, Retired)

Thoughtful planning, whether in warfare or investing, materially enhances the prospect of success.  Asymmetric opportunities abound for those prepared to broaden their perspective of what is possible and bring to life strategies informed by insights into the ‘bigger picture’ — what it takes to actually win both the battle and the war.

At Collins St Asset Management, the planning and preparation we undertake before investing into an idea requires an equally broad lens. Genuine ‘Value’ centric opportunities are rarely understood in isolation from their global context, be they gold, media, uranium, infrastructure or even technology stocks.

The last of these examples is perhaps the most topical for Value investors, particularly those domiciled in Australia, as they are less frequently associated with Artificial Intelligence (AI) or Information Technology (IT) related portfolio holdings. 

Historically this has been an outworking of valuation metrics where long dated cash flows and newly created key performance indicators such as Price to Sales saw share prices rewarded with little reference to profit or the moat that sits around it. The profound impact that AI and IT has had, and will continue to have, has always been accepted.

“AI is probably the most important thing humanity has ever worked on. I think of it as something more profound than electricity or fire.”
– Sundar Pichai (CEO, Google)

Recently, the valuation aspect of this narrative has flipped with the pace of AI and IT related disruption creating concern that Software as a Solution (SaaS) business models — that were themselves considered quite avant garde only a few years ago — are now at risk of obsolescence from newer AI generative systems.

The sell-off that resulted was savage with the share price of many SaaS stocks both domestically and abroad witnessing declines of around 60% throughout a highly volatile 12 month period as the selected stocks in the graph below demonstrate.

Source: Factset

As Value investors, this raised three key questions in our minds:

1. Will all SaaS business models be negatively impacted by AI and if so, will the effects be uniform across the sector?

2. Is there any residual value within the SaaS sector or is there another drop to come?

3. If there is opportunity for us to pursue amongst Saas stocks following the share price drawdowns, where is the best place to find that value?

Firstly, our research led us to understand that not all SaaS businesses would be negatively impacted by AI, in fact, some may actually be net beneficiaries. This is because:

• Some SaaS businesses have privately-sourced data sets relevant to the industries they operate in that can not be replicated or exploited by external AI systems. These data sets have value that can actually be unlocked through the development of internal AI systems in such a way that could see EBITDA margin expansion over a timeframe that would outpace external AI systems. 

Examples of this include historical listing times/patterns for residential real estate, viewer engagement of online ads and, in the case of car sales businesses, historical sales prices which are not as readily available as they are in the property sector.

• Certain industries where SaaS companies operate are also deeply relationship dependent. The outworking of this is that the customer set for the internally leveraged AI insights already exists for the SaaS company and, due to broader ‘package’ or ‘subscription’ based pricing models can be more readily commercialised.

Examples of this include the co-dependent nature of the relationship between real estate agents and their online advertisers and also between car yards and their online advertisers.

Secondly, the value remaining in the sector was real, although not uniform across markets due to country specific dynamics and market structures. As Collins St Asset Management have both global and domestic mandates, this presented an opportunity to focus research efforts towards those stocks that were most prospective and which, in the eyes of Colonel David Hackworth, may have given us a well-earned advantage in the market.

By way of example, consider the following stocks:

Source: Factset

Each of the stocks shown above have significant market capitalisations, established networks within their country of listing, existing revenue streams and are paying a dividend, thus reflecting residual value in the business model.

The third question therefore is whether or not there is better opportunity domestically, globally, or across both markets for this set of SaaS sold off stocks.

As can be seen from the following table, the choice is clear.

Source: Factset

The key points to note are that:

• The two global stocks are on forward price to earnings multiples almost half of their Australian equivalents.

• The free cash flow and EBITDA margins were higher for the global stocks.

• Whilst the earnings per share estimates were good across the board, the estimates did favour the Australian stocks implying more growth potential, although with less margin of safety in the upfront acquisition multiple and heightened execution risk from management as they pursue the higher growth strategies.

   

Concluding Thoughts

Investing, much like the warfare experienced by Colonel Hackworth, does not exist in a vacuum. Looking at the bigger picture and, through thoughtful planning and an open mind, there is potential to unlock asymmetry that makes investing far from a ‘fair fight’.

It is this exact same mindset that we bring to life across all of our publicly listed equity strategies, most recently through the open ended Collins St Global Fund which has achieved over 20% per annum net returns since inception in February 2024 and which holds current positions in both Auto Trader and Right Move.