Contact Us
Subscribe to Causeway Insights, delivered to your inbox.
A Software Company Does Not Profit on Code Alone By Jonny Shea, Causeway Senior Fundamental Analyst
Generative AI has fundamentally changed the economics of software development. Applications that once took months or years to build can now be replicated in a fraction of the time. The technology has become proficient enough that a large private equity advisor has begun using AI “vibe coding” during acquisition due diligence to test how readily a target’s product could be reproduced.
This exercise may be worthwhile for specialized point-solution software providers, but it risks overstating the role of code in determining the value of more complex software businesses, such as enterprise resource planning (ERP) companies.For these companies, the competitive advantage is not the code alone. Many have long competed against lower-cost—or even free, open-source—alternatives that replicate much of their functionality. What has proven far more difficult to reproduce is the ecosystem surrounding their applications: implementation partners, trained workforces, and importantly, the business logic, data, and workflows deeply embedded in customers’ operations.
Key insights
- AI makes software easier to build, but not necessarily easier to replace.
- Enterprise software derives its value from embedded workflows, data, and customer integration; not only code.
- Active investors can identify opportunities by distinguishing durable software moats from businesses with genuine AI disruption risk.
ERP systems and other deeply integrated enterprise applications encode decades of accumulated workflows, regulatory and compliance requirements, approval processes, pricing exceptions, and customer-specific operating practices. They also house enormous amounts of mission-critical, often proprietary, organizational data, where strong governance, auditability, and data security are paramount.
A true ERP substitute must not only recreate an interface, but also the operational complexity behind it.
A true substitute must not only recreate an interface, but also the operational complexity behind it. Maintaining, updating, and adapting enterprise software as customer needs and regulations evolve is often more difficult and costly than building the initial application.
The vibe coding test may therefore produce misleading signals when evaluating businesses. A prototype can appear convincing while failing under the demands of real-world production. At the same time, an unsuccessful AI replication attempt does not necessarily mean a product is inherently difficult to replicate—only that the approach or execution fell short.
For active investors, distinguishing between software that appears functional and software that is truly embedded within customers’ businesses has become even more important in the AI era. Valuation frameworks that focus too narrowly on the underlying code risk overlooking the business characteristics that drive long-term value. At Causeway, our research aims to go beyond evaluating a product’s features or codebase. We assess the durability of customer relationships, the complexity of embedded workflows, the depth of implementation and maintenance ecosystems, switching costs, data advantages, and the long-term sustainability of competitive positioning.
For active investors, distinguishing between software that appears functional and software that is truly embedded within customers’ businesses has become even more important in the AI era.
Anticipated disruption from AI has led markets to paint the software sector with a broad brush, fueling narratives such as the so-called “SaaS apocalypse.” We believe these moments create opportunities for disciplined, research-driven active management to distinguish between businesses whose competitive advantages are genuinely at risk and those whose moats extend far beyond the code itself.
Jonny Shea is a senior fundamental analyst at Causeway, specializing in the technology and communication services sectors.
This market commentary expresses Causeway’s views as of July 2026 and should not be relied on as research or investment advice regarding any stock. These views and any portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. Forecasts are subject to numerous assumptions, risks, and uncertainties, which change over time, and Causeway undertakes no duty to update any such forecasts. Information and data presented has been developed internally and/or obtained from sources believed to be reliable; however, Causeway does not guarantee the accuracy, adequacy, or completeness of such information. For further information on the risks regarding investing in Causeway’s strategies, please go to https://www.causewaycap.com/wp-content/uploads/Risk-Disclosures.pdf.
