The earnings boom no one's celebrating |
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This week’s insights include: |
- One of the best first quarters in years and the market barely blinked: S&P 500 earnings grew 27% year-on-year, the strongest since Q4 2021, with 10 of 11 sectors in the green. So why does no one feel like celebrating?
- The hyperscalers' cash flow problem: Google Cloud's backlog nearly doubled to $462 billion and margins jumped to 32.9%. Meanwhile, AWS free cash flow collapsed from $25.9 billion to $1.2 billion in a year.
- The SaaSpocalypse is real, but uneven: Adobe, Salesforce and Intuit are down 40% to 70% on AI disruption fears, even as their income statements hold up. Some will be replaced. Others will reinvent themselves. Telling them apart is the opportunity.
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This week's Market Insights article is a 5 minute read! |
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Q1 earnings season is almost done, and on paper it was the best quarter in years. S&P 500 earnings grew 27% year-on-year, the strongest print since late 2021. You'd expect a celebration. Instead, software stocks are getting torched. Adobe, Salesforce and Intuit have all fallen more than 40% over the past year. Intuit just dropped another 20% in a day despite beating on revenue and earnings. So what gives? Isn't a record quarter supposed to be good news? The story, as usual, is more nuanced. This week we unpack the disconnect between the income statements and the share prices, why the hyperscalers' cash flow is quietly collapsing, and how to tell which software moats actually survive the AI era, and which could be about to spring a leak. |
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| | “Competitors can easily mimic the improvements yielded by operational excellence, eventually arbitraging out the value to the business” |
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Here’s a quick summary of what’s been going on: |
- Rising bond yields and oil prices put pressure on rate-sensitive sectors.
- SpaceX’s blockbuster IPO will further concentrate markets.
- Spotify’s AI remix push opens a new revenue lane for streaming.
- Intuit plunges 20% on AI overhaul and TurboTax revenue miss.
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The market just shrugged at strong numbers... |
The first quarter produced commendable results, at an aggregate level, by all accounts.10 of 11 sectors posted growth, and expectation beats ran well above average. You'd never know it from looking at software stocks. Adobe, Salesforce and Intuit are down 40% to 70% over the past year, and the market is selling the sector on any whiff of weakness, even when companies exceed the hurdle set for revenue and earnings. Here's what we talk about in today's article: |
- The subscription model is the real vulnerability: Monthly SaaS fees made sense when software was the product. But agentic AI tools charge by usage, not by seat, and incumbents can't match that pricing without torching their own economics. Some will have to take a pay cut to keep their moat.
- Capacity, not demand, is the new bottleneck: Google Cloud is processing 16 billion tokens per minute (up 60% in a quarter) and still can't keep up. The memory chip shortage has added hundreds of billions to Samsung, SK hynix and Micron's market caps. The AI build-out is rerouting profits in ways the income statements are only starting to show.
- Repositioning is happening in real time: ServiceNow is pitching itself as the vendor-neutral orchestration layer for multi-vendor AI. Others are leaning into proprietary data moats competitors can't buy at any price. We walk through which strategies actually hold up and which ones are wishful thinking.
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We also share a Watchlist of AI Enablers and Infrastructure Software companies already profiting from the build-out in today's article. | |
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Join the discussion by leaving a comment! |
Are the big SaaS companies a generational bargain, or a value trap? |
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Monday 🇺🇸 US Memorial Day - Markets Closed Notes: US equity and bond markets are closed for Memorial Day. Expect lighter volumes across global markets. |
Tuesday 🇺🇸 US CB Consumer Confidence (May) Forecast: 92, Previous: 92.8
Why it matters: A further decline would confirm consumers are taking strain due to energy costs and inflation. |
Wednesday 🇦🇺 Australia Inflation YoY (April) Forecast: 5.1%, Previous: 4.6%
Why it matters: Another hot print would end any hopes for near-term easing. |
Wednesday 🇺🇸 US GDP Q1 2026 (Second Estimate) Forecast: 2.0%, Previous: 0.5%
Why it matters: The headline number would only confirm the original estimate, but economists will be looking at any revisions to the consumer spending or inventories components. |
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