On the buy side covering software, how well do you truly understand the technology?
I am currently in sell side equity research covering software, and I wanted to know, for those of you on the buy side covering software, how well do you understand the underlying technology of the companies you follow?
I'm wondering as I cover some database and data management companies (e.g. MDB, SNOW, CFLT, etc.), and I find them extremely hard to understand the underlying technology, and I'm wondering if this is something that could hold me back if I ever attempt to transition to the buy side? As an investor, how well do you feel that you need to understand the technology to be succesful? Do you almost need to know how to use and implement the technology, or do you have more of a basic understanding of what use cases each vendor solves?
Whenever I go to product heavy user conferences and analyst days, I feel that I might not be cut out for this industry since I don't understand the tech right of the bat.
I mean you definitely need to dig into it but after 50 conversations with experts and advisors and industry participants, some of which you should find yourself, done over ASO years, you'll have enough of an understanding to be fine. Anyone can do it, it's not rocket science to understand what each one does and why it's needed. I mean take MDB for example, it's a document database. You should understand why that's important, what kinds of apps it powers, what came before that, what innovations are in the space, how it gets made, what people do with it, etc. YouTube videos can be helpful. It's as much of an understanding of past present and future as it is understanding the product. You'll never need to go deep into architecture, that's what you hire West Monroe for.
It depends - you can spend hours learning about the specifics of how technology works, why it is better, etc. but the most important questions about a stock don't necessarily get that deep, and you can easily "miss the forest for the trees" or whatever the expression is.
If you thesis relies on X taking market share from Y, then you better have a good reason for it, an understanding of why, and some evidence to support or track that thesis, but again, the focus is on the 1-3 key drivers that are being debated, and what is going to shift the market's sentiment about the name (what reinforces or disputes that stock X can grow at this rate with these margins, and for how long?)
Some places clearly believe that understanding the nuances of the customer stickiness and looking at this business in a vacuum of sorts is most important - visit the factories, understand why ROIC is so strong, etc. If that is the firm's investment philosophy (we buy 7 businesses and hold them for 5 years, we operate like private equity owners, etc.), well then they probably spend a ton of time on it. Other less so. There are different approaches and philosophies here for sure.
I invested in TTD after the IPO. I visited their offices, took their internal trading education program, and spoke to ad-tech industry leaders about what was going on. Was probably overkill, and end of day, did I truly understand the nuances of the ad-tech stack, all the players, how their bidding tech worked, etc.? Probably not nearly anywhere close to people who do it for a living, but I understood enough basics when it came to what would drive results, the strength + vision of management, and was able to rely enough on the feedback of other decision makers/industry players who explained what was happening.
I am currently interning at a LO (I am a junior studying finance at a non target, will be at LMM IB in NYC this summer) I "cover" a lot of the SMID cap software names. Would love to connect and talk about software with you sometime.
I am personally fascinated by the infrastructure/DevOps names (DDOG, SNOW, ESTC, DT, GTLB, FROG etc).
What has worked for me is understanding the purpose of the software, who uses it internally and where the software sits in the broader "stack."
Once I have those 3 figured out, I attend the product demos that some of these software sales folks host where they talk about how to use the platform on a day to basis. Another thing that I do to understand the technology is connect with software engineers on linkedin and ask them about the platform. This should help you understand the use cases and workloads that the software can address as well as the value proposition.
There are also some software engineers that talk about the architecture of different apps/software on linkedin.
Here are some that I follow:
https://www.linkedin.com/in/brijpandeyji/
https://www.linkedin.com/in/ginacostag/
I have only been looking at/covering software companies for 4 months now but I hope this helps!
Start with the customer and work backwards
How does the customer use the product, how do they perceive it competitively vs others, how hard would it be to rip and replace (time, money, user retraining, data migration, external integrations, etc.)? That is exponentially more important than understanding the 0’s and 1’s.
Don’t get me wrong, the underlying tech is important. You want to understand the underlying tech to try and discern how differentiated and easy to replicate a product is, but if it is characterized by high switching costs (which is the most important aspect of understanding software IMO), it won’t really matter. Think CRM platforms, really not all that hard to replicate the underlying tech, but extremely burdensome to rip and replace.
I'm sure healthcare analysts know how to perform surgery
top tier comment
Oof someone MSed us
Do you actually think the stock price of a company is based on how good their software is?
For what it's worth, there are a lot of good system design / architecture breakdowns of modern applications on YouTube, Substack or Medium.
If you Google around should be able to understand how different parts of the stack fit together inclusive of use cases for some of these more behind-the-scenes / platform-y companies.
This is why MM > SM. Dumbass SMs trying to understand product and crap and company miss revenue by 1% and stock trades off 40% instead of knowing what Fking moves the stock.
same idiots also “deep diving” into Coca Cola product flavor differentiation when it was obv short based on Ozempic thesis and tough comps.
😲
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