Taking Stock 26 February 2026

James Lee writes:

'Where are all the adults?'

I was sitting with a fund manager late last year as another Software as a Service (SaaS) stock rolled over. It had already fallen hard from its highs and was down again before lunch. He looked at the screen, shook his head and asked the question.

He wasn't talking just about retail investors. Many are new to the market post Covid. He was talking about professionals.

The average hedge fund managers are in their mid-40s. Most institutional portfolio managers are not far off that. These are experienced people, but many weren't managing money in the dot com bubble. They were still in high school. When sentiment shifts, markets can still behave like a kindergarten.

Experience does not remove cycles, but it does give you context if you choose to use it.

At the end of last year we said risk would be high in 2026, particularly in growth assets where valuations were full and expectations generous. That wasn't a heroic forecast. It was simply acknowledging that when markets are priced for perfection, it doesn't take much to disturb them.

A lot can change in a year: facts change, capital tightens, narratives wobble. This time AI has shifted from being a tailwind to being perceived as a threat. So it's not a shock that, when that happens, the most expensive parts of the market tend to re-price first.

That repricing is what the market is calling SaaSpocalypse.

SaaSpocalypse is not the end of software. It is the accumulation of pressure on software valuations when growth expectations normalise, and the cost of capital is no longer low. The S&P Software index has fallen sharply year to date (circa 20%). Large global names like Salesforce, Workday and Shopify have all sold off materially in 2026. Xero, one of my favourite companies and a home grown success, has not been immune and is down 33% this year.

Why is the market hitting these stocks?

First, valuation compression. For years software traded on revenue multiples and total addressable market narratives. When interest rates were near zero, a dollar earned in 2032 was almost as valuable as a dollar earned today. That is no longer true. When discount rates rise, long-dated cashflows are worth less. Software companies, by their nature, are long-duration assets. When multiples halve, it does not mean the business has broken. It means the cost of capital has changed.

Second, growth normalisation. Through Covid, digitisation accelerated and capital was abundant. Many SaaS businesses experienced extraordinary growth. Now growth has slowed from exceptional to merely good. Markets do not reward 'good' when they have priced in 'exceptional'. The reset is mechanical.

Third and the most important has been the change of the AI narrative. The market is asking whether the new tools that have been released by Anthropic AI (which allows autonomous development) lowers the barrier to entry in software. If AI can write code, does software become commoditised? If generative tools automate workflows, do Small and Medium-sized Enterprises (SMEs) need as many subscriptions? If new entrants can build products faster and cheaper, does competition intensify?

These are rational questions.

But we need to separate the ability to build software from the ability to build a business.

Xero's journey is a founder-built story. Rod Drury founded Xero in 2006 with the vision of taking accounting out of the desktop and into the cloud, long before cloud software was mainstream in small business.

He listed the company in 2007 when it had fewer than 100 customers, raising modest capital to fund what at the time looked like an audacious global ambition. Over the following decade, Xero scaled from a start-up into a global SaaS platform serving 4.6 million subscribers. Drury stepped down as CEO in 2018, but the core strategy remained consistent: build the SME financial operating system, integrate deeply with banks and accountants, expand internationally, and compound subscription revenue.

Today Xero is a serious business with over $2 billion in revenue, meaningful EBITDA, expanding margins and strong recurring revenue. It is not a concept stock. The network effect of Xero, the deep integrations and the cult following are deep moats.  As someone once told me, the last thing a SME turns off is Xero.

And yet since January 1 this year, Xero's share price has fallen materially (-33%), more than some of its more traditional stocks. Infratil (-4%), Fisher & Paykel Healthcare (+3%) and Spark (-3%) have all seen volatility, but the de-rating in XRO has been sharper. That divergence tells you how the market is pricing risk.

High-growth SaaS has been punished more aggressively than infrastructure, telecom or medical devices.

But let's be clear. These are wildly different businesses, so why did I choose to compare these four?

Well, Infratil and Spark earn over $3 billion in revenue and $1 billion in EBITDA, FPH and XRO have over $2 billion in revenue and both are likely to have more than $1 billion of EBITDA by the end of the decade.

If all four companies are forecast to earn between $1 billion and $1.1 billion of EBITDA in FY2028 using market screener as consensus, why do we value the same $1 billion so differently?

As an investor you get to compare today's valuation of that $1 billion in earnings, against a combination of margin profile and growth, to decide what valuation and risk profile makes sense to you.

I like the rule of 40 rule for companies. This is a simple rule where you combine growth and EBITDA margins. Where companies exceed a score of 40 that is an interesting starting point for comparison.  It applies best in software as cost to acquire a customer is a choice vs keeping the margin, so the market values growth and margin as equal. While best suited to software, I think it is a useful framework for all companies. Overlay the capital / investment required to achieve that growth and put that into the thought process of return on that capital investment.

The $1 billion dollar club

Spark is a telecom operator with infrastructure assets and stable but modest growth. Its risk is structural competition, including technologies like Starlink that threaten parts of the traditional network model.

Last year Spark had negative growth of 3% and over 30% EBITDA margins. It has a $7 billion Enterprise value (market cap plus debt) and is expected to earn $1.1 billion in 2028.

Fisher & Paykel Healthcare is a global med-tech leader with strong margins and durable demand, but it faces its own risks, including competitive pressures in respiratory care and broader pharmaceutical shifts such as GLP-1 drugs potentially altering long-term health trends.

FPH continues to grow more than 10% per annum, with north of 30% EBITDA margins.

EV (Enterprise Value) is circa $21 billion and FPH is expected to cross $1 billion EBITDA in FY 2028 or 21x FY 28 EBITDA.

Infratil is a capital allocator across infrastructure and digital assets. Its returns depend on disciplined capital deployment and the ability to scale data centres and other assets efficiently.

Growth requires capital, low organic growth and slightly below 30% EBITDAF. EV is circa $18 billion, over $1.1 billion in FY2028 of EBITDA.

Xero, by contrast, is capital light. Its costs are predominantly people and technology. AI is as likely to lower Xero's development cost and enhance productivity as it is to create competition. If AI tools reduce coding time, improve automation and enhance analytics, that benefits an embedded platform with scale. The friction for a small business to rip out its accounting system, payroll, tax compliance and bank integrations remains uncomfortably high. Distribution, trust and ecosystem still matter.

Xero is growing at 20% per annum with margins that range from 20% to 30%, depending on how you classify some growth costs, with an EV around $14 billion, EBITDA expected to be $1.1 billion in 2028.

Every company has risk, but looking at this objectively on the same $1 billion of EBITDA:

1) Spark's risk is structural disruption in connectivity.  Starlink-based internet and phones may one day significantly reduce broadband and cellular usage. Spark trades on 7x EV/EBITDA, has high cash flow but is going backwards.

2) Fisher & Paykel's risk is product and regulatory cycles. Trades on 21x FY28 and faces the possibility that new drugs reduce the demand for their product.

3) Infratil's risk is capital allocation and asset pricing as it requires capital investment and trades on ~18x FY28.

4) Xero's risk is sustaining growth and defending its moat in a faster software world, but needs to continue to grow, yet XRO is just under ~14x FY28.

To me XRO is now at an interesting intersection where the multiples are no longer silly, the growth and margin profile is impressive. It has low capital intensity and is likely to continue to grow.

If you believe SaaSpocalypse is not destruction but rather compression, then XRO is worth opening the file again. At less than 14x FY28 EBITDA it now prices lower than an infrastructure or health care company. That is a notable change.

The market has recalibrated long-duration growth. It has inserted uncertainty around AI. It has reduced the tolerance for perfection. That does not mean the model is broken. It means expectations have been reset.

When markets move like this, the correct discipline is comparison. Compare growth. Compare margins. Compare capital intensity. Compare structural drivers.

Volatility is not new. It is the mechanism by which markets move from narrative to numbers.

We said risk would be high this year. It is. Lots can change. That is always true.

But when the playground gets noisy, the adults are the ones quietly comparing businesses rather than stories.

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Contact Energy Retail Share Offer

Contact Energy is currently raising $75 million from retail shareholders at a price of $8.75 per share, through a retail offer. Existing, New Zealand-based shareholders can apply for up to $100,000 worth of new shares. The pro-rata allocation is approximately 6%.

Existing shareholders have until the close of the business on 6 March to apply. Applications are made online, through the website: www.contactshareoffer.co.nz. Payment is made via Direct Debit. Applicants will require their Validation Number to complete the online form with this number sent to shareholders by the share registry last week.

Genesis Energy Rights Share Offer

Genesis Energy has also announced its intention to raise money, with a $300 million rights issue opening next week on 4 March. This offer has been priced at $2.05.

The Crown has already confirmed it will participate in the raise.

 Shareholders on the register as at the close of business 26 February will be entitled to buy 1 new share for every 7.9 held. The offer opens on 4 March and closes on 17 March. Applications must be made online through the website: www.shareoffer.co.nz/genesis and only require a CSN and bank account details.

Property For Industry Bond Offer

PFI has announced an offer of 6.5-year senior secured fixed rate bonds.

More details are expected next week.

At this stage, given current market conditions, we are expecting it to offer a coupon of around 5.00%. 

If you would like to register your interest in this offer, pending further information, please contact us with the amount you wish to invest and the CSN you wish to use.

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Travel

2 March - Auckland (Ellerslie) - Fraser Hunter

2 March - Christchurch - Chris Lee (FULL)

3 March (am) - Christchurch - Chris Lee (FULL)

3 March (pm) - Ashburton - Chris Lee (FULL)

4 March - Timaru - Chris Lee (FULL)

6 March - Wanaka - Chris Lee

9 March - Whanganui - David Colman

10 March - New Plymouth - David Colman

11 March - Palmerston North - David Colman

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