r/valueinvesting
It's the bond market, stupid (Why SaaS is underperforming)
High bond yields and inflation hurt SaaS valuations, while heavy-asset, AI infra, and defense stocks outperform due to real capex.
- Heavy-asset, low-obsolescence (HALO) trades are outperforming.
- AI infrastructure and defense stocks benefit from massive capex and government spending.
- High 10-year Treasury yields (~4.5%) significantly increase the discount rate for growth stocks.
- We are entering an interest rate hiking cycle with persistent inflation, making future cash flows less valuable.
- Asset-light SaaS companies are underperforming as the zero-interest-rate environment is over.
Too many posts focus only on price and earnings growth, while ignoring the discount rate that makes all that growth worth less. Asset-light SaaS companies outperformed when interest rates were near zero and investors sought growth at any price.
However, HALO(Heavy Asset, Low Obsolescence) trades, AI infrastructure stocks and defense stocks have outperformed lately driven by the wave of capex spending by companies and defense spending by countries.
When 10 yr bond yields are near 4.5%, the discount rate is significantly higher than when rates were 0% or 2%. Money now is worth more than money later.
We are entering a phase of interest rate hikes. The secular decline of long-term interest rates is over. Like it or not, inflation is here to stay. Trade accordingly.