AI's Shadow Over Software Valuations: Thoma Bravo's Bravo Sounds the Alarm

Key Takeaways

• Orlando Bravo believes many public software companies face disruption from AI advancements.
• He suggests some valuation declines are justified due to this impending disruption.
• Bravo also argues that some software firms have been unfairly punished by market reactions to AI.
• Thoma Bravo admits to overpaying for Medallia, citing overestimated growth projections.
• The broader tech-software sector has experienced significant declines, reflecting AI's potential impact.

Orlando Bravo, a leading voice in the software investment world and co-founder of Thoma Bravo, has issued a stark warning about the transformative impact of artificial intelligence on the software industry. Speaking at Thoma Bravo's investor meeting in Miami, Bravo asserted that many publicly traded software companies face a looming threat from AI-driven disruption.

Bravo's comments suggest a coming realignment of software valuations, with some companies facing justifiable declines as AI technologies encroach on their market share. He refrained from naming specific companies at risk but emphasized the breadth of the potential disruption. Thoma Bravo, founded in 2008, manages a portfolio exceeding $183 billion across 77 companies, primarily focused on software.

However, Bravo tempered his cautionary remarks by highlighting that not all software companies are destined for decline. He noted that some businesses have been unfairly swept up in the market's negative sentiment toward the software sector, arguing that these "phenomenal businesses" are poised to thrive in what he terms the "agentic era" – an era dominated by AI-powered agents.

The software sector has already felt the tremors of AI's ascent. The iShares Expanded Tech-Software Sector ETF (IGV) has experienced a significant downturn, reflecting the market's apprehension about the potential for AI to displace existing software solutions at a lower cost. The ETF is down approximately 28% from its peak in September.

Bravo's analysis isn't without its own internal scrutiny. He acknowledged that Thoma Bravo made a misstep in its $6.4 billion acquisition of Medallia in 2021, admitting that the firm overestimated the company's growth prospects. This admission underscores the challenges of accurately forecasting growth in a rapidly evolving technological landscape.

These pronouncements follow recent criticisms from Apollo Global Management President John Zito regarding perceived overvaluation within the software sector, specifically calling out Thoma Bravo's acquisition of Medallia. Bravo's willingness to acknowledge the Medallia miscalculation suggests a growing awareness of the need for more realistic valuation models in the face of AI's disruptive potential.

Why it matters

Bravo's statements carry significant weight, given Thoma Bravo's prominent position in the software investment landscape. His analysis suggests that investors need to carefully reassess their holdings in software companies, distinguishing between those vulnerable to AI disruption and those positioned to capitalize on the new AI-driven paradigm. The market's reaction to AI is already underway, and Bravo's commentary highlights the need for a more nuanced and informed approach to valuing software assets in this era of rapid technological change.