MW Why this investor says you can make good money off software stocks - if you trade them like telephone directories

By Barbara Kollmeyer

Deep value investor Lee Roach smells 'blood in the water'

A slow decline in a business can still be a profitable one. Software could be that, says investor Lee Roach.

AI disruption fears have cooled some for now, but whether stocks can keep a grip on that calm lies heavily at the feet of Nvidia earnings later. It needs to dazzle, or at least not disappoint.

Beaten-down software stocks are drawing the attention of one deep value investor, Lee Roach, who in our call of the day says there is much the market is not understanding here.

Roach writes The Value Road newsletter on Substack, and his typical hunting ground is for microcap stocks and companies that have emerged from bankruptcy.

"If it was cheap, unloved, and had a balance sheet I could get my arms around, I was interested," he writes in a Tuesday post.

While software stocks were never his focus, due to "absurd" multiples and paying up to 60 times revenue for businesses that hadn't worked out how to make a profit, they've now got his attention.

The S&P 500 Software Index XX:SP500.451030 is down 22% so far this year, with big names like Salesforce (CRM) off 30%.

Roach acknowledges the market's caution, given large language models are now threatening to do what has been the bread and butter of those companies. But he says the selloff has compressed multiples at a pace rarely seen outside of the 2008 crisis.

"I have been doing this long enough to recognize the smell of maximum fear. It smells a lot like this," says Roach.

To be sure, the competitive value of these stocks, or their moats, has been degraded and in some cases largely wiped away by AI, he says. "But here is the critical distinction that the market is failing to make: a narrower moat does not mean zero terminal value," he says.

He points to a string of industries and companies that went into structural decline, but still offered a "long and profitable history." Investors who bought tobacco companies in the early 2000s still made massive returns for the next two decades. Print directories, legacy media and some traditional retail are other examples he cites.

"The pattern repeats itself over and over again in market history: when the market prices a business for death, and that business instead manages a slow decline, the returns can be remarkable," he says.

Using price-to-free cash flow as a guide, Roach explains that a company trading at two or three times free cash flow and declining 5% a year has some ways to go before it hits zero.

Here's one way to look at it. The iShares Expanded Tech-Software Sector ETF IGV has declined 21% over 52 weeks, but its free cash flow per share actually rose 11% last year, according to FactSet data.

Granted, only one component of that ETF actually trades below 3 times cash flow, the cybersecurity firm Rapid7 $(RPD)$, but there are a handful of others in single digits.

He argues that these hard-hit software companies have enviable mature businesses, with thousands of enterprise customers and contracts stretching over years.

"The replacement cycle for major enterprise software is measured in years, not months, and the switching costs-even in a world where AI makes switching easier-are still substantial," he says. "What that means is that these businesses are going to continue throwing off significant cash for years."

He says markets are also assuming these companies "are going to sit in their offices and watch AI startups eat their lunch." That discounts their big advantages including data, customer relationships, distribution and domain expertise.

"Free cash flow per share grows even as revenue plateaus or declines slightly. The companies that execute this transition well are going to emerge as leaner, more profitable versions of themselves," he says.

Also, a two-person startup will lack the support level of these bigger companies to get a product in front of customers and negotiate contracts.

"When a deep value microcap investor starts looking at software, you know the tide has turned. Either I have lost my mind, or the prices have finally come to me. I am betting it is the latter," says Roach.

Read: 10 stocks Wall Street expects to roar back after dropping at least 20% in 2026

The markets

U.S. stock futures (ES00) (YM00) were tilting higher ahead of the open. Gold (GC00) was rising.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              6890.07    0.68%  -1.27%  0.65%   15.70% 
   Nasdaq Composite                                                     22,863.68  1.26%  -4.00%  -1.63%  20.17% 
   10-year Treasury                                                     4.055      -2.60  -19.10  -11.70  -20.80 
   Gold                                                                 5212.8     6.46%  0.66%   20.33%  78.00% 
   Oil                                                                  65.97      5.89%  5.43%   14.91%  -4.56% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Coming after the close, Nvidia (NVDA) earnings will be scrutinized for clues on the health of AI spending.

Workday shares (WDAY) are tumbling after the software group's disappointing guidance and discussion of increased AI investments.

HP shares $(HPQ)$ are falling on disappointing guidance that it blames on rising memory chip costs.

Restaurant chain Cava $(CAVA)$ gave an upbeat forecast and shares are climbing.

Axon Enterprises $(AXON)$ is surging after the Taser stun-gun maker said it's becoming an AI company.

Warner Bros. $(WBD)$ said Paramount Skydance's $(PSKY)$ new $31-a-share proposal could mean a better deal than the offer it has already accepted from Netflix $(NFLX)$.

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The chart

Investors tend to make their feelings known quickly about Nvidia results. This chart from Vanda Research shows the retail flows into the chipmaker after previous earnings reports. "Historically, retail has bought NVDA aggressively in the first 60 minutes following post-market releases. The only clear exception was the May-25 miss, when retail sold at the open. Tomorrow's early flow will tell us quickly whether retail buying appetite has returned," says Viraj Patel, strategist at Vanda.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   TSM     Taiwan Semiconductor Manufacturing 
   AMD     Advanced Micro Devices 
   GME     GameStop 
   INFY    Infosys 
   MSFT    Microsoft 
   AMZN    Amazon 
   PLTR    Palantir 
   AAPL    Apple 

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February 25, 2026 07:00 ET (12:00 GMT)

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