Theme and Background
This section serves as the introduction to the Oakmark research report, explaining why the firm began buying software stocks at the current juncture (February 2026). The report notes that market sentiment toward the software industry has undergone a dramatic shift from extreme optimism to extreme pessimism over the past decade, creating value investment opportunities.
Core Thesis
The author’s core investment argument is that the market’s current fear that generative AI will disrupt existing software companies is excessive, leading to a collapse in industry valuations and presenting rare opportunities for value investors to buy high-quality businesses. The author believes that the rise of AI will not replace existing enterprise software but may instead deepen companies’ reliance on it.
Counter-Intuitive/Contrarian Judgment:
- The market believes that AI lowering the barrier to programming will lead companies to build their own software (e.g., CRM/ERP), but the author argues this misunderstands the role of enterprise software—its core value lies in reliability, support systems, and industry standard status, not the user interface.
- The market believes that AI will change how knowledge workers interact with software, thereby eroding the moats of existing companies; however, the author contends that this evolution may ultimately increase the value of current software leaders.
Key Arguments and Data
- Market Sentiment Reversal: Over the past decade, the market awarded software stocks high valuations due to the SaaS model (recurring revenue, high growth, high margins, high switching costs); now, the market is selling off software stocks due to AI threats and insufficient GAAP profitability.
- Valuation Collapse: The report notes that the market once “happily ignored costs in pursuit of growth” but now “demands the safety of GAAP profitability,” causing software industry valuations to “collapse.”
- Core Argument: The value of AI tools is limited by the depth and quality of the data they can access and process. As the core systems of record and actual work execution mechanisms, existing enterprise software companies possess vast proprietary data (e.g., sales pipelines, customer information, financial transactions) stored in secure environments. AI will rely on this structured, trustworthy data and workflows, thereby deepening companies’ dependence on existing systems.
- Rebuttal to the “Build-Your-Own” View: Large enterprises choose mature products like Salesforce or SAP not because of flashy interfaces, but because they are industry standards, offering reliability, support infrastructure, and ecosystems that startups or in-house solutions cannot match.
Companies/Assets Involved
- Salesforce: Cited as a representative of “industry standard” enterprise software suites, used to counter the bearish view that “companies will build their own CRM.”
- SAP: Similarly cited as a representative of “industry standard” enterprise resource planning (ERP) systems, playing a role analogous to Salesforce.
- Author Role: Signed by Jeremy G. Thames, CFA (Director of U.S. Research and U.S. Investment Analyst), indicating that the view comes from a senior analyst at Oakmark.
Investment Implications
- Directional Judgment: Investors should capitalize on the current excessive pessimism toward the software industry by selectively increasing holdings in software companies that meet quality standards and offer attractive valuations.
- Specific Focus: Attention should be directed toward “mission-critical” enterprise software suites that are deeply integrated into client workflows, as these are least likely to be disrupted by AI and may even become more indispensable due to AI.
- Risk Compensation: The author explicitly states that, as a value investor, they are willing to accept uncertainty, provided the current price adequately compensates for this risk. This means investors should seek software targets whose valuations have significantly corrected but whose fundamentals remain solid.