Bank of America warns software industry of "tariff storm" with subscription model serving as a safe haven.

Bank of America Corp has recently released a in-depth research report on the software industry, focusing on the impact of macroeconomic uncertainty on software companies. The report reviews the fundamental performance of software companies in 2022 under high macro uncertainty, and analyzes key indicators trends in different business models (consumer, subscription, and hybrid) and end markets (enterprise, SMB/consumer, and mixed market), including revenue growth, billing growth, Operating Profit Margin (OpM), and sales and marketing efficiency. Sensitivity of risk in different business models and market areas The report delves into the risk characteristics of software companies during an economic downturn. The data from 2022 provides strong references. That year, both the revenue growth rate and billing growth rate of software companies declined. The report points out that although the macroeconomic environment is challenging, demand signals are not entirely pessimistic, but rather mixed. In the subscription model, companies with over 70% of their revenue coming from traditional subscriptions have higher revenue visibility and show more resilience. On the other hand, consumer-oriented business models, with over 70% of their revenue tied to usage or transaction volume, may face a sharp slowdown in revenue growth during an economic slowdown. Looking at the end markets, software companies focused on the enterprise market are relatively stable, as enterprise IT spending is more resilient. In contrast, software companies targeting SMBs and consumers may suffer more severe impacts during an economic downturn. Hybrid companies fall somewhere in between, with their risk depending on their specific business composition. Potential impact of tariffs on the software industry The report particularly emphasizes the potential impact of tariffs on the software industry. The direct risks primarily focus on the e-commerce software sector. The U.S. government announced tariffs of at least 10% on all countries and eliminated the minimum de minimis exemptions for China and Hong Kong. This puts e-commerce software suppliers like Shopify (SHOP.US), Global-E Online (GLBE.US), and BigCommerce Holdings (BIGC.US) at higher tariff risks. Revenue risk exposure in geographic and industry vertical areas The report also provides insight into the revenue risk exposure of software companies in different geographic regions and industry vertical areas. For example, some software companies have a high proportion of revenue in the Europe, Middle East, and Africa (EMEA) region, making them more susceptible to local economic fluctuations and policy changes. In industry vertical areas such as manufacturing, retail, etc., software companies' revenue may be influenced by industry-specific economic fluctuations. Stock valuation and investment recommendations Analysts at Bank of America conducted a detailed analysis of stock valuation in the software industry. The report notes that the enterprise value (EV) multiple of the software industry to the next 12 months revenue (NTM Revenue) has dropped to 5.0x, below the 5-year and 10-year median of 7-8x. This indicates that market expectations for the software industry have significantly lowered, but may also suggest that current valuations are attractive. The report also highlights the importance of free cash flow (FCF) yield. Around 15 software companies have an FCF yield of over 8% by 2026, providing potential value support for investors. Conclusion and outlook Bank of America's report provides investors with a comprehensive analysis of the software industry, covering macroeconomics, policy changes, industry dynamics, and company fundamentals among other dimensions. The report reminds investors that in the current macroeconomic environment, investments in the software industry require more cautious and detailed analysis. Investors should closely monitor macroeconomic indicators, policy changes, and the financial health of companies to formulate reasonable investment strategies. In terms of investment recommendations, the report suggests focusing on companies with high revenue visibility, strong free cash flow generation capabilities, and competitive advantages in the enterprise market during an economic downturn. Furthermore, as the macroeconomic conditions improve, investors can gradually increase investments in software companies with larger exposure to the consumer and SMB markets. Risk factors The report also explicitly points out that the software industry faces a range of risks, including macroeconomic slowdown, policy changes, increased competition, and technological changes. When making investment decisions, investors should fully consider these risk factors and make reasonable asset allocations based on their risk tolerance and investment objectives.