Donville Kent Asset Management September 2025 Commentary

Core Insights - The software sector is experiencing a downturn due to concerns about the impact of AI on traditional Software as a Service (SaaS) companies, leading to significant stock declines [5][6][21] - The narrative surrounding AI's potential to disrupt software companies is nuanced, with some companies positioned to benefit while others may face challenges [5][6][21] AI's Impact on Software - AI is perceived to create competition through cheaper and faster app development, termed "vibe-coding," which raises concerns about security and quality [7][8][9] - Traditional software companies in regulated sectors like healthcare and finance are likely to maintain a competitive edge due to stringent security requirements that vibe-coded apps cannot meet [9][11] - Companies like Adobe, Salesforce, and others in less regulated sectors may face increased competition and business pressure from AI-driven solutions [11] Company Analysis - VitalHub focuses on mission-critical software for the healthcare sector, handling sensitive data with necessary certifications, making it less susceptible to the risks posed by cheaper alternatives [16][17] - Constellation Software has a diverse portfolio of niche software solutions, leveraging decades of customer knowledge to create tailored solutions, thus reducing disruption risk from AI [19][20] - Both VitalHub and Constellation are implementing their own AI initiatives to enhance efficiency and profit margins [20] Financial Performance - VitalHub reported Q2 earnings with a revenue increase of 47% to $23.9 million and a cash earnings growth of 132% [38] - Constellation Software's Q2 revenue grew by 15% to $2.84 billion, with cash earnings increasing by 34% [40] - Zedcor demonstrated strong growth with an 84% revenue increase to $13.5 million, highlighting its potential in the market [42] Market Opportunities - The recent pullback in software stocks presents an opportunity for investors to identify companies that will benefit from AI while avoiding those at risk of disruption [21] - The DKCI Fund is focusing on adding positions in VitalHub and Constellation, anticipating strong future performance based on their business models and market positioning [21][30]