Software’s Good Story – and Why It’s Not Good Enough
April 7, 2026
10 min read
Software's "Good Story" — and Why It Isn't Good Enough
The favourite sector of the past decade is staging a relief rally. The narrative is seductive, the fundamental picture is deteriorating. Our original analysis for The Market by NZZ — plus the extended investor's view for arvy readers.
The thesis on video — 1 minute
In 30 seconds — the core thesis
- Software is recovering on price — the IGV ETF is showing a classic relief rally after the sector sell-off. The narrative sounds seductive.
- But the fundamental picture is deteriorating — in a way that a price recovery cannot fix. Growth, margins, and capital intensity all point in the wrong direction.
- We were engaged in software and liked the sector — but we've turned away. When quality investors turn their back on a quality sector, it's worth understanding why.
The original analysis — the seductive opening
Software stocks are recovering.
After one of the most violent sector sell-offs in recent history, the iShares Expanded Tech-Software ETF (IGV) is staging what looks like a relief rally. The narrative is seductive: valuations have fallen, free cash flow yields have risen, and these remain high-quality businesses with recurring revenue.
What's not to like?
Quite a lot, if we're honest. The fundamental picture is deteriorating in a way that a price recovery cannot fix. And the chart, read correctly, tells a story. One that most software investors probably don't want to hear.
I'm not saying this as an outsider. Quite the opposite. As quality-oriented investors, we were engaged in software for years — and we liked the sector.
But we've turned away.
When quality investors turn their back on a quality sector, it's worth understanding why.
→ Read the full article on The Market by NZZ
Chart 1: Software — forward P/E (IGV ETF) absolute and relative to equal-weighted S&P 500
Source: FactSet, Goldman Sachs
01The uncomfortable question behind the NZZ analysis
If you've read the article above, one question remains open that doesn't fit into a 4-minute column — but is everything for your investment decision: How can a sector simultaneously be "quality" and exit a quality portfolio? At first glance this seems contradictory. Microsoft, Adobe, Salesforce, ServiceNow — these are textbook examples of quality business models: high cash returns, recurring revenue, durable competitive advantages, strong balance sheets. Quality investors should love this.
They do. Until they don't. And the difference between "sector quality" and "investment quality" is exactly what writes this article — and exactly what most retail investors systematically overlook.
A quality business model is a necessary but not sufficient condition for a quality investment. Three more conditions must be present: reasonable valuation (even the best business becomes a bad investment at three times fair value), sustainable margin structure (what good is quality if margins erode?), and positive trend confirmation (what good is quality if the math is currently working against the sector?). When even one of these conditions falls away, a quality business can still become a bad investment. That's exactly what's happening in software.
This mechanism — how quality is defined, why not every "quality business" is automatically a "quality investment", and why disciplined valuation is the harder part than company selection — is the core of our pillar article The Tortoise Problem: Why Quality Wins — When You Stay With It. Anyone who liked the NZZ piece should read this one.
02Three layers of deterioration
What the NZZ analysis treats compactly for space reasons can be broken down into three separate, mutually reinforcing strands. Each one alone would be a warning signal. Three together are a fundamental shift — and the reason a pure valuation recovery cannot fix the picture.
Deterioration 1 — Growth slowdown
Software was for more than a decade the sector with the highest organic growth rates in liquid investable markets. The "Rule of 40" (growth + margin rate > 40%) was a reflexive given. Today it's more exception than rule. Even in the top tier, organic growth rates have fallen from 20-30% to single digits. This has implications that go far beyond nominal growth: a company growing at 25% organically can carry high valuations because the growth halves any valuation multiple every five years. A company growing at 7% cannot.
Deterioration 2 — Margin compression
The second deterioration is more subtle — and precisely for that reason more dangerous. Software margins were historically one of the toughest fortresses in the market: low marginal costs per additional customer, scale advantages, pricing power. This fortress has developed cracks over the last 24 months. AI functionality is increasingly expected as a standard by customers — not as a premium feature for which they pay extra. At the same time, the costs of this AI functionality (compute, licences for foundation models, R&D pressure) are substantial. Margins are squeezed from two sides — pricing power shrinks, cost base grows. Over the coming quarters that means: same revenue, lower operating margin.
Deterioration 3 — Capital intensity shock
The third deterioration is structurally the most important. Software was for decades the textbook example of an asset-light business model — minimal capital deployment, high cash conversion, free cash flow close to operating profit. This characteristic was the foundation of high valuation multiples because it enabled high cash returns on capital employed (ROIC). With the AI wave, this has shifted. Anyone wanting to remain relevant in the AI era must buy or rent compute, train their own models or build on others' models, scale data infrastructure. From an asset-light becomes — at least in part — a CapEx-driven industry. And when capital intensity rises, ROIC falls mathematically — even at the same operating margin. This is the actual core of the quality question.
The multiplier trap
These three deteriorations aren't additive. They are multiplicative. Lower growth × lower margin × higher capital intensity produces a cash flow trajectory significantly weaker than the sum of the individual effects would suggest. Valuation multiples respond particularly sensitively to such multiplicative shifts. A price recovery that only prices in the "cheap valuation" without addressing the structural shift is vulnerable.
03What this means for your quality portfolio
These three deteriorations hit the actual core of the software investment case — not the surface. Quality investing is systematically based on high cash returns on capital employed, supported by pricing power, scale advantages, and low capital intensity. When capital intensity rises structurally and pricing power falls through AI standardisation, the fundamental cash generation machine shifts. The business can objectively remain "quality" — the investment, however, must be recalibrated.
This is exactly the difficult part of quality investing in practice: not every idea that was once right stays right. Discipline doesn't mean clinging to convictions — it means updating convictions when the underlying facts shift. Anyone not doing this is confusing loyalty with logic.
This has concrete implications for investors, depending on how they're engaged:
| Form of engagement | Structural software exposure | What to review |
|---|---|---|
| Broadly diversified world ETF (e.g. MSCI World) | ~22-26% IT, of which significant software share | Concentration risk: a "passive" portfolio is today actively long software |
| Tech-focused strategies | 50%+ software-near exposure | Structural bet on a sector — during a fundamental shift |
| Actively managed quality strategies | Variable — should currently be reducing | How does the manager view software? Has the portfolio reacted? |
| Single stock picks | Specific to the position | Three questions: growth, margin, capital intensity — check all three |
The most important insight: many retail investors believe they are "passively" investing — and are actually highly concentrated sectorally in a sector whose fundamental ground is currently shifting. This isn't a call to sell. It's a call to consciously know what you hold and why.
How arvy is positioned in exactly this situation — and why we fully sold all software positions in Q1 2026 — is documented transparently in the current arvy Strategies Quarterly Report Q1 2026.
04Three scenarios for the next 12 months
Nobody can time the market — not us either. But we can lay out disciplined scenarios that honestly reflect the risk-reward. Here are the three most plausible paths for the software sector over the next twelve months, with honest assessment of the respective probabilities:
Bull Case
AI monetisation accelerates sustainably
Software companies manage to establish AI features as paid premium layers rather than standard expectations. Pricing power returns, margins stabilise, the high R&D investments begin to pay off. Valuations become justifiable — and the current rally becomes a trend reversal. Plausible, but not the base case.
Base Case
Gradual underperformance, valuation reset over 18-24 months
The market gradually reprices the structural shifts. Valuation multiples compress further without dramatic crash. Within the sector, aggressive differentiation — the real AI winners separate from the AI losers. Quality investors with active differentiation come through better than broad sector engagements. Our base case.
Bear Case
Second wave like 2022 — the market reprices the asset class
A growth disappointment in the next reporting season or a clear margin warning from a bellwether triggers a broad re-rating. Software is collectively reduced from quality portfolios. The IGV loses another 25-35% from current levels. In this scenario, investors who were diversified come out best — not the passively concentrated.
How arvy fared in the COVID 2020, rate shock 2022, and tech corrections 2023 and 2025 stress tests — and why quality typically comes through full market cycles better — is described in our pillar "Investing in Turbulent Times".
05What you should review now
The most important message of this article is not "sell your software stocks." Such blanket recommendations are exactly what makes bad investment advice — they ignore your individual situation, your horizon, and your existing allocation. The most important message is concrete and personal: review what you hold and why.
Four concrete steps for the next 30 minutes:
1. Inventory. Look at how much of your portfolio actually has software exposure. With an MSCI World ETF that quickly hides 15-20%. With thematic tech funds 50%+. With an active quality manager — ask explicitly. You can't decide what you don't know.
2. Concentration check. Ask yourself: starting from cash today, would I voluntarily put 20% of my wealth into a single tech sub-sector? If the answer is no, you have a hidden concentration you should consciously review.
3. Strategy check. If you're invested in an actively managed fund (or with an asset manager): how has the software allocation evolved over the last 12 months? If it hasn't changed at all — ask why. A non-reactive strategy in a fundamental shift is a warning signal.
4. Horizon check. If your investment horizon is 15+ years, most of these moves are noise. Quality strategies work over cycles. If your horizon is 3-5 years, sector concentration during a deterioration phase is particularly risky.
What discipline looks like in practice
Quality investing doesn't mean "hold everything forever." It means "hold the right thing as long as it's right, and adjust when fundamentals shift." The latter is much harder than the former — emotionally, because you have to part with a thesis you once cherished. But precisely this willingness to honest re-evaluation is the difference between a strategy that works for 30 years and one that fails in a single shift.
06Frequently asked questions
Does this mean arvy is selling all software positions now?
arvy has already done exactly that. In Q1 2026 we fully divested all software positions — a deliberate reduction to zero, not a partial adjustment. The reasoning matches the analysis above: the three deterioration layers together shift the sector structurally outside what we currently consider an investable quality universe. Full documentation is in the Q1 2026 Quarterly Report.
When would arvy structurally re-add software?
When at least one of the three deterioration layers reverses — meaning either organic growth re-accelerates sustainably, or margins structurally stabilise, or capital intensity falls again. Currently we see none of these turning points. As long as that remains the case, our software exposure stays at zero. We aren't dogmatic — we're disciplined. When the data changes, our position changes.
Which sectors does arvy prefer instead?
The exact sector and single-stock allocations are communicated transparently every quarter in our quarterly reports. Generically: we continue to seek quality businesses with sustainable cash generation — these are currently found in several areas outside software. The concrete shifts in our allocation since the start of the year are documented in detail in the Q1 2026 Quarterly Report.
Should I as a retail investor sell software?
Blanket no. But: consciously know how much software exposure you have (often hidden higher than thought), check whether this concentration matches your risk profile, and in any case avoid buying more now because "it looks so cheap." A falling valuation is not automatically a buy signal — sometimes it prices in structural shifts that aren't yet fully visible.
Further reading — the thematic anchors of this analysis
The Tortoise Problem
Why quality investors sometimes leave quality sectors
arvy Quarterly Report Q1 2026
Current sector allocation transparently documented
Investing with arvy: The Complete Guide
How this analysis fits the overall strategy
Investing in Turbulent Times
Quality across full market cycles — historical evidence
Why arvy
The full strategy and positioning explanation
The True Cost of Investing
Why concentration risk is also a form of cost
The honest re-evaluation
We don't love software any less than we did two years ago. We continue to see the business models as fundamentally excellent. What has changed is not our enthusiasm — but the math. Growth, margin, and capital intensity have shifted structurally, and a disciplined quality mandate must respond. The alternative would be to cling to a thesis because it feels right rather than checking whether it still is right. That's exactly the trap most sector investors fall into.
Quality investing over 30 years doesn't work through loyalty to individual sectors. It works through constant, honest re-evaluation of the underlying facts — and the willingness to give up a once-correct position when the facts shift. Software is today the most prominent test of this principle. It won't be the last.
Original written by Thierry Borgeat, Co-Founder of arvy, for The Market by NZZ. The extended arvy companion piece reviewed by Patrick Rissi, CFA and Florian Jauch, CFA. Data sources: FactSet, Goldman Sachs, own analyses. IGV ETF: iShares Expanded Tech-Software ETF (NYSE: IGV). Forward P/E based on consensus estimates. Last updated: April 2026.
Disclaimer: This article is for general educational purposes and does not constitute personal investment advice. The sector and security designations mentioned are illustrative and not buy or sell recommendations. Past performance is no guarantee of future results. Scenarios are assessments, not forecasts. arvy is a FINMA-supervised asset manager with a CISA licence (Art. 24). Imprint & Legal Notice.
