In a recent interview, Thoma Bravo co-founder Orlando Bravo shed light on the impact of artificial intelligence (AI) on software companies, offering a nuanced perspective on the industry's valuation landscape. Bravo's insights are particularly intriguing as they challenge the notion that AI will uniformly disrupt software companies, instead suggesting that some software names have endured unjustified hits during the AI-driven sell-off.
Bravo's statement that AI will disrupt software companies faster is a bold claim, but it highlights a critical aspect of the industry's evolution. The rise of AI model companies has indeed threatened traditional software services, leading to a 28% decline in the iShares Expanded Tech-Software Sector ETF since its peak in September. However, Bravo's argument that some software companies have been unfairly punished by the market is a compelling one.
One of the key points Bravo emphasizes is the overestimation of growth rates in acquisitions. His firm's acquisition of Medallia for $6.4 billion in 2021 serves as a case study for this. Bravo admits that they made a mistake by overestimating Medallia's growth, resulting in an overpayment. This error underscores the challenges of accurately assessing the impact of AI on software valuations.
What makes Bravo's perspective particularly fascinating is his belief that some software companies are 'phenomenal businesses that are actually going to be big winners in the agentic era.' This raises a deeper question: How can investors discern between companies that will thrive and those that will struggle in the face of AI disruption? Bravo's acknowledgment of the mistake in the Medallia acquisition provides a valuable lesson in the importance of accurate growth projections.
Furthermore, Bravo's comments on the 'arrogance' in software valuations by private equity firms, as criticized by Apollo Global Management President John Zito, add another layer of complexity to the discussion. The $6.4 billion acquisition of Medallia, which Bravo now admits was overvalued, serves as a cautionary tale for investors. It highlights the need for a nuanced understanding of the market and the potential risks associated with overestimating growth.
In conclusion, Bravo's insights offer a fresh perspective on the AI-driven disruption of software companies. His acknowledgment of the Medallia acquisition mistake and the potential for some software companies to emerge as winners in the agentic era provide valuable insights for investors. As the industry continues to evolve, a careful and nuanced approach to valuation and investment decisions will be crucial in navigating the challenges and opportunities presented by AI.
