Risk Points In Various Industries-Software Industry
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Risk Points In Various Industries-Software Industry

Software industry risk points (investor must have industry knowledge)

1.Classification

The operating system, database, enterprise resource planning system, customer relationship management system, security software, computer games, other.


2. Competitive advantage

The entry barriers of the software industry are low, and those high-tech companies often face the threat of technological innovation to replace them. Its main competitive advantages include high customer conversion costs; b, network effects; c, brand.


3. Industry knowledge

a. License revenue: License revenue is the best indicator of current demand because it tells us how much new software is being sold during a particular time period. Pay close attention to the changing trend of license revenue. 

b. Deferred income: If the deferred income growth slows down or the deferred income balance begins to decline, it may be a signal that the company's business has begun to slow down.

c. Accounts receivable days: It is equal to accounts receivable / (revenue/number of days in the reporting period). The rising number of receivables days indicates that a company is expanding its credit terms with customers to complete the transaction, which is a squeeze on revenue in the next few quarters and may lead to a loss of income.


4. Characteristics of successful software companies

a. Increasing sales revenue: Successful software companies should achieve at least a 10% annual growth in sales revenue under economically stable conditions. Steady growth not only indicates a growing demand for the company's software but also a loyal customer. It also means that the company has the ability to raise prices appropriately without compromising sales.

b. Long-term good record: Look for companies that have experienced several industry cycles and have at least five years of valuable financial historical data.

c. Gradually expanding profit margins: Successful software companies can increase profit margins. Once software development is completed, its production cost is essentially zero, which means that each additional sales revenue should be directly included in operating profit. Look for companies that have high gross margins and license revenues that grow in tandem with the company's total sales. d. Huge customer installation base: Successful software companies have a huge customer installation base that is loyal to the company's products and services.

e. Excellent management: The most important asset of a software company is the people who work here every day (such as programmers, salespeople, managers, etc.).


5. Summary

The software industry has extremely broad growth prospects, large cash flows, high capital investment income and good financial health. The software industry is also very competitive and is a typical strong cyclical industry. Look for companies that have a strong competitive advantage and have a relatively long duration. People's optimistic expectations for the software industry are likely to lead to a reduction in the rate of return on investment, causing investors to fall into the growth rate trap. Therefore, it is best to trade at a larger discount of intrinsic value rather than being tempted by a single, state-of-the-art technology.



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