Software
TradingKey Investment ResearchUpdated：2026-03-30Risk Warning: The information on this page is based on publicly available data from the securities market or historical data of investment products. The dimensions of the indicators have limitations and do not represent the future performance of the products. This information is for investors' reference only and does not constitute investment advice. Any actions taken based on this information are at your own risk.
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Current Holdings
How We Select Software Stocks
In the software industry, we target exceptional companies capable of delivering sustained compounding growth over the long term. Our selection process looks beyond short-term revenue fluctuations to focus on three foundational pillars: the quality of growth, the potential for operating leverage expansion, and the inherent sustainability of the business model. We believe that outstanding software companies achieve durable, high-quality revenue growth through products with strong customer stickiness, highly scalable business models, and robust ecosystem barriers—ultimately translating that growth into steadily expanding profits and free cash flows.
1. Quality of Revenue Growth
We place significant emphasis on dissecting revenue composition, with particular attention to the proportion of recurring revenue, which acts as the bedrock of business stability. We closely examine key metrics such as annual recurring revenue (ARR) and net revenue retention (NRR) rates; elevated retention levels signal strong customer loyalty and high product value. We also monitor customer concentration to mitigate risks arising from over-reliance on a small number of large accounts. Additionally, we evaluate the sources of new customer acquisition and trends in customer acquisition costs to assess the efficiency and sustainability of growth.
2. Operating Leverage and Profit Expansion
Software products exhibit near-zero marginal replication costs; once a company surpasses its breakeven threshold, incremental revenue largely flows through to profits. Our objective is to identify firms that are either approaching this critical profit inflection point or have already entered a phase of rapid profit expansion. While revenue growth rates remain important, we place equal or greater weight on their alignment with margin improvement. We track long-term gross margin trends, seeking sustained expansion driven by economies of scale in procurement, architectural optimizations, and other efficiency gains. We also analyze trends in sales, research and development, and general administrative expense ratios; as revenue scales, these should trend downward, materially lifting operating margins. The ultimate manifestation of operating leverage is a rising free cash flow margin.
3. Ecosystem and Platform Barriers
We seek companies that go beyond standalone products to build true platforms and ecosystems. Such ecosystems generate powerful network effects and high switching costs, creating moats that are exceptionally difficult to breach and thereby ensuring the persistence of long-term excess profitability. We evaluate platform strength by assessing multi-sided user connectivity, the formation of closed-loop data and interaction flows, and the vibrancy of developer and partner communities. We pay close attention to the degree of ecosystem lock-in—specifically, whether the product has become deeply embedded in customers’ core workflows, rendering replacement prohibitively costly. We further examine the company’s ability to extend adjacent product lines from its core offering and drive cross-selling opportunities. Companies with robust ecosystems and platform dynamics typically exhibit the clearest long-term growth trajectories and most defensible competitive positions.
FAQs
What is the "Rule of 40" in software investments?
The Rule of 40 is not a rigid benchmark but a balanced framework that evaluates the quality and sustainability of enterprise growth.
It addresses a fundamental question: Is the company achieving growth at a reasonable cost, or is it masking underlying weaknesses through unsustainable spending?
When the sum of revenue growth rate and profit margin consistently falls well below 40% over time, it often signals either insufficient scale benefits or an immature business model.
Conversely, when the combined figure significantly exceeds 40%, investors should scrutinize whether growth is nearing its limits.
Is it better to invest in software (SaaS) or artificial intelligence hardware (chips)?
The choice is not about superiority in absolute terms but about selecting between two fundamentally different return profiles.
Software tends toward long-term compounding, deriving its value from deep customer stickiness, high operating leverage, and durable recurring economics. AI hardware is more cyclical, with its primary return driver being profit elasticity during periods of aggressive capital expenditure expansion.
Within portfolios, software is generally better suited as a long-term core holding, while AI hardware serves more effectively as a tactical, cyclical enhancer.
The key discipline lies in clearly defining each asset’s intended role rather than conflating the two.
Why are cybersecurity stocks considered a prudent investment choice?
Cybersecurity expenditures are closer to "risk prevention expenditures" rather than discretionary expansion investments.
As the degree of digitalization increases, the potential losses from security incidents continue to amplify, making related budgets remain rigid during economic downturns.
However, it is essential to note the rapid speed of technological substitution and intense industry competition.
Thus, "security" reflects more on the demand level rather than on individual stocks.
