Vertical software is expensive, but worth the investment

Vertical software

What’s vertical software?

The official name of industry software should be vertical market software, which is software developed for a niche industry or for the needs of a unique customer group. The most famous example is Adobe (ticker: ADBE), almost all of its software is aimed at customers in the multimedia industry.

Its opposite is, in short, horizontal market software. A horizontal market is one that caters to a wide range of consumer markets. In other words, it’s a mass-market solution designed to satisfy the needs of as many people as possible. The most famous example is Microsoft Corporation (ticker: MSFT). Almost all of its software belongs to this category, and it does not limit the user’s identity or industry attributes.

Comparison of vertical software companies

Company P/EIndustryMarket cap ($ billion)
Microsoft26.36horizontal 1820
Alphabet18.27horizontal 1170
Meta11.29horizontal 316.67
Salesforce462.28horizontal 128.27
Oracle24.86horizontal 214.57
Fair Isaac41.66credit rating14.75
Veeva60.55life science26.2
as of 12/16/2022

Characteristics of Industry Vertical Software

Wide moats

Because the barriers to entry are too high, the moat of industry software is very wide, and even most industry software companies are oligopolistically occupying the entire market, and it is not uncommon for them to monopolize the market.

Dream investment target

In other words, large-scale industrial software companies are dream investment targets that investors dream of. But the premise is that it must pass the test of time. It is not easy for the very few companies that can survive. The main reason is that the market is small, and there are actually not many companies that can survive the early difficulties and years of continuous losses.

Market valuations are high

No matter what kind of software, there is almost a switching cost, so the valuation of software companies will be inherently higher than that of hardware companies; as for why, please see the explanation in my previous article “Software PE ratio is about twice that of hardware. What is the basis?“.

Industry software companies already have inherent valuation advantages, coupled with their monopoly scarcity, the valuations of such listed companies are very high, and there are few times when the stock price is cheap. It is rare that the stock price is “slightly” (please note that my wording is slightly) more friendly to the people. It usually only happens when the stock market crashes once in ten years. Even in a bear market, the stock prices of such companies are the same It is unattainable.

Market capitalization is lower

Industry software Because it is software developed for niche industries or for the needs of unique customer groups, the number of customers is inherently limited, not too many. This makes it difficult to compare the total revenue of successful horizontal market software giants.

Product is expensive, the right to hike the price

But don’t underestimate them, because the barriers to entry are too high; almost all of them are monopoly manufacturers with oligopoly or monopoly in the market, so the unit price of their products is very amazing, because customers have no choice, and it is impossible to have alternatives. In short, they all have the right to raise prices unilaterally.

credit: crunchbase

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