economy
February 25, 2026
Why has the software sell-off been so extreme? Look to this arcane way to value stocks
Uncertainty around the long-term viability of software business models has major ripple effects on today's stock prices.
TL;DR
- Software stocks have experienced a dramatic sell-off, despite intact near-term earnings expectations and stable profits.
- The primary driver of the sell-off is Wall Street's reduced confidence in valuing software businesses beyond the next few years due to AI disruption fears.
- Investors are rethinking assumptions around terminal value, which represents the 'forever' value of a business.
- Elevated uncertainty around terminal value leads investors to demand lower current valuations.
- Terminal value is a key component of discounted cash flow (DCF) models, a gold standard for valuing companies over multiyear periods.
- Small changes in terminal value assumptions can cause larger swings in stock valuations than changes in near-term cash flow projections.
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