As seen on BRIIDGE recently, the software application industry has been disproportionately impacted by drastic quantitative tightening measures aimed at controlling interest rates. The cyclical nature of long-duration assets, which are negatively correlated with rising rates, fully materialized, causing the industry to underperform the broader market by over 50% on an equal-weight basis over a three-year horizon.

In contrast, more established businesses across the industry performed in line with the market.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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Further compounding these challenges were industry-specific headwinds, including overvaluation stemming from the speculative frenzy following the post-pandemic boom in software products, increasing competition from rapidly evolving AI tools, and disappointing guidance updates—all of which have put additional pressure on valuations. This analysis is also relevant to the software infrastructure industry.

However, the impact of monetary policy has been less severe. Over the same three-year period, the software infrastructure industry outperformed both the software application industry and the broader technology sector by over 10% and 20%, respectively, on an equal-weight basis.

Similar to the software application industry, where disparities in profitability were magnified by rising interest rates, the software infrastructure industry also underperformed the market by over 40% on an equal-weight basis. However, mega-cap companies such as Microsoft, Oracle, and Palo Alto Networks saw double-digit outperformance.

Beyond their shorter duration profiles, these established businesses benefited from tailwinds linked to increased demand for computing power driven by the AI boom. This surge in demand required enhanced cloud infrastructure and costly purpose-built chips for AI computation.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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For example, Microsoft's operating and net income margins rose by 30% and 10%, respectively, compared to pre-pandemic levels, while the industry median temporarily turned negative.

Despite this, the sales growth for these major players remained on par with the industry median. Looking ahead, a more accommodative monetary policy could contribute to relative valuation compression, as enthusiasm surrounding AI fades. This shift may also coincide with industry consolidation, as overfunded startups struggle to generate meaningful returns on investment.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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