The Value of Software

59 Pages Posted: 18 Oct 2022

See all articles by Collin Dursteler

Collin Dursteler

London Business School

Roberto Gomez Cram

London Business School

Alastair Lawrence

London Business School

Date Written: July 9, 2022

Abstract

Software companies have steadily become key pillars of the digital economy, representing upwards of 12 percent of U.S. market capitalization. A simple buy-and-hold strategy of pure-play software companies over the past three decades produced annual alphas of over 7.1 percent. We document that these firms are growing at 13.9 percent annually and that both management and analysts systematically underestimate over a third of this growth. We show that these expectation errors appear to largely explain the foregoing outperformance of software companies and that management, analysts, short sellers, and other market participants ignore key performance indicators that describe these pure-play software firms and signal future growth. Together, the study underscores the value of software to the economy and how its economic impact has been significantly under-appreciated for the past two decades.

Keywords: Software valuation, asset pricing, investor expectations, portfolio theory

JEL Classification: D84, G11 ,G12

Suggested Citation

Dursteler, Collin and Gomez Cram, Roberto and Lawrence, Alastair, The Value of Software (July 9, 2022). Available at SSRN: https://ssrn.com/abstract=4242504 or http://dx.doi.org/10.2139/ssrn.4242504

Collin Dursteler

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Roberto Gomez Cram (Contact Author)

London Business School ( email )

Regent's Park, London NW1 4SA
Regent's Park
London, London NW1 4SA
United Kingdom

Alastair Lawrence

London Business School ( email )

Regent's Park
London
United Kingdom

HOME PAGE: http://Www.alastairlawrence.net

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