Source: "Clouded Judgement 10.11.24 - Budget Flush - by Jamin Ball" from cloudedjudgement.substack.com
Author: Jamin Ball
Main Theme: The article speculates about a potential "budget flush" at the end of 2024, similar to the one observed at the end of 2023.
Key Ideas and Facts:
- Budget Flush: Companies tend to rush to spend remaining budget funds before the fiscal year ends to avoid budget cuts in the following year. This can lead to a surge in software purchases in Q4.
- 2023 Budget Flush: The author argues that the apparent "bounce back" of the software industry in Q4 2023 was largely due to a budget flush rather than a true market recovery.
- 2024 Prediction: Jamin Ball anticipates a potentially even stronger budget flush at the end of 2024 due to a strong economy, Fed rate cuts, and continued budget discipline throughout the year.
- Supporting Evidence: Recent strong performance of software stocks, particularly consumption-based models like Cloudflare, Datadog, Mongo, and Snowflake, is cited as potential early evidence for this prediction. The author suggests this might be a good time to invest before a potential re-acceleration or, conversely, an opportunity to "sell the news."
- Interest Rates: The recent rise in the 10-year treasury yield to over 4% is seen as a positive sign, indicating a strong economy and potentially less urgency for the Fed to continue rate cuts.
Key Quotes:
- Budget Flush Explanation: "A budget flush occurs when companies rush to spend remaining budgeted funds before the fiscal year ends, often due to a 'use it or lose it' mentality."
- 2023 Headfake: "Turned out it was more of a headfake, and the strength in Q4 was more about budget flush than some structural recovery in software buying."
- 2024 Setup: "As we head into the end of 2024 I wonder if a similar, but even stronger, budget flush will play out…All of that could create a good setup for software in Q4!"
Additional Insights:
- The article provides an interesting analysis of software industry trends, particularly regarding valuation multiples, growth rates, and operating metrics.
- The author connects macroeconomic factors like interest rates and economic performance to potential developments within the software market.
- The piece offers valuable insights for investors considering entering or exiting positions in software companies.
