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While software indices experienced fluctuations due to nationwide shutdowns and stay-at-home orders, most select indices have returned to their pre-COVID levels, as the software industry is considered a structural winner given the need for greater digital capabilities across all industries

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Market Update: Impact of COVID-19 on Valuation Levels in the Software Sector

EXECUTIVE SUMMARY

COVID-19 Impact

  • While software indices experienced fluctuations due to nationwide shutdowns and stay-at-home orders, most select indices have returned to their pre-COVID levels, as the software industry is considered a structural winner given the need for greater digital capabilities across all industries
  • Infrastructure, Development, and ERP software segments have seen significant stock and multiple expansion due to their offering of reliable cloud-based solutions that are in high demand by a growing remote workforce; Securitysoftware is expected to see increased spending as organizations rush to secure endpoints and combat vulnerabilities in the public cloud
  • In the mid-term, we expect software companies with a high degree of recurring revenue, strong profit margins, and critical assets around communication, collaboration, content delivery, and security to experience increased demand and usage; valuation multiples across these offerings are likely to see meaningful expansion
  • While M&A projects have slowed in the months of March and April, transaction values and deal volumes are expected to rebound as demand for high-quality software assets increases and investors seek to utilize idle capital
  • In the long term, we expect software valuations to remain stable due to their ability to counter significant exposure to macro-sensitive events and drive cash flow by means of flexible, recurring revenue models. We expect M&A markets to rise over the next several quarters with an increased prioritization on critical cloud infrastructure assets and other mission critical solutions
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