Monday's Musing: When The Hunters Become The Hunted

April 22, 2024

Expect Software Giant Hunters To Soon Be The Hunted In A Digital Giant's Quest For Growth

Six of the Magnificent Seven (Microsoft, Apple, Nvidia, Alphabet [Google], Amazon, Meta [Facebook]) stocks have entered the four comma club -over $1 trillion in market cap. With a combined market cap of over $13.2 trillion, these six players continue to defy physics with continuous quarters of double digit organic growth. Digital giants by definition have deployed five key strategies:

Build the biggest network
Own and disintermediate the customer relationship
Compete for data supremacy
Deploy digital monetization models
Take a long term growth mindset

In the enterprise software category, the largest enterprise software vendors are nowhere close to $1 trillion in market cap. In fact, they have a long way to go. Here's their market cap as of May 3rd, 2024

Oracle $318.27B
Salesforce $265.45 B
Adobe $217.80 B
SAP $214.12 B
Intuit $176.18 B
IBM $152.22 B
ServiceNow $147.18 B

While these software vendors have been seen as the acquirers for quite some time, market conditions could shift quickly making them attractive targets for acquisition by a hungry Digital Giant seeking growth.

Running Out Of Runway For Double Digit Organic Growth Means More M&A In The Future

Should economic conditions take a turn for the worse, the digital giants will have to find inorganic opportunities. Technically digesting companies one-tenth to one-fourth their size would be very possible. In fact, if it weren't for a hawkish anti-trust stance by the current presidential administration, one could expect a faster rate of mergers and acquisitions. Most of the digital giants could find adjacencies to support their growth.

Concurrently, hardware and chip companies such as Broadcom have entered new markets by moving from chips to hardware to software. The next set of players below the trillion dollar market cap club will most likely consolidate in the next three years to gain scale and meet financial targets. With software a highly profitable endeavor, low margin players will likely find themselves drawn to an acquisition of software assets

The Bottom Line: End Of Zero Interest Rates Changes Everything

The end of zero interest rates have shown a confluence of forces in exponential efficiency, AI arbitrage, and margin compression. Each of these factors have transformed market conditions and forced management teams to rethink their business models. As digital giants struggle to achieve double digit growth and maintain their astronomical market caps, inorganic growth may be the only option. Expect a string of strange mergers and acquisitions with a change or presidential administrations in the quest for alpha. New tech conglomerates will emerge to challenge the digital giants. More importantly, new digital giants will emerge to disrupt the incumbents.

Your POV

Where do you see the next set of mergers? Do you think we'll see more bulking up by category or across category?

Add your comments to the blog or reach me via email: R (at) ConstellationR (dot) com or R (at) SoftwareInsider (dot) org. Please let us know if you need help with your strategy efforts. Here’s how we can assist:

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