Example Software Co. (XSW)
- Opened
- 5 Jan 2026
- Avg entry
- $180.00
- Cost
- £173.86
- Value
- £187.39
- Weight
- 18.9%
- Return
- +7.8%
Illustrative thesis. A subscription software business whose share price implies growth is about to stall, while renewal data suggests customers are still expanding their use. The bet is that durable net revenue retention gets the market to pay for more than a slowdown.
Everything on this page is invented to show what a mature thesis looks like. Example Software Co. does not exist.
Business overview
Example Software Co. sells workflow software to mid-sized companies on annual subscriptions. Revenue is about 90% recurring, priced per seat with usage-based add-ons. Most new revenue comes from existing customers adding seats and modules rather than from new logos.
Why am I interested now?
The shares fell about 40% over twelve months as growth slowed from 16% to 13%. Over the same period free cash flow margin rose from 18% to 24%, and retention stayed above 110%. The price reflects the slowdown; I’m not sure it reflects the cash generation.
What does the market appear to believe?
At 5x forward sales, near the bottom of its five-year range, the market seems to treat the company as a maturing business whose seat growth is about to be capped by AI tools that let customers do more with fewer users.
What might I see differently?
Usage-based add-ons are growing faster than seats, which is the opposite of what a “fewer seats” story predicts. If pricing shifts toward usage, slower seat growth could coexist with stable revenue growth.
Valuation thoughts
I value it mainly on EV/sales and EV/FCF against its own history and peers, cross-checked with a reverse DCF. I’m not confident enough in long-term margins to lean on a full DCF yet.
Key financial metrics
| Metric | FY23 | FY24 | FY25 |
|---|---|---|---|
| Revenue ($m) | 410 | 468 | 529 |
| Revenue growth | 16% | 14% | 13% |
| Gross margin | 78% | 79% | 80% |
| Free cash flow margin | 18% | 21% | 24% |
| Net revenue retention · company-defined | 118% | 115% | 114% |
| Share count (m) | 62.0 | 62.8 | 63.1 |
Source: Fictional annual reports, FY23–FY25
Valuation
Method: Multiples · Price $180.00 on 2026-01-05
- bear
- $135.00 -25.0%Growth falls to high single digits; 4x sales
- base
- $215.00 +19.4%Growth holds near 12%; 6x sales
- bull
- $270.00 +50.0%Retention re-accelerates; 7.5x sales
| Multiple | Now | History | Peers |
|---|---|---|---|
| EV / sales (NTM) | 5.0x | 4.2–11.0x (5y) | 6.1x |
| EV / free cash flow | 21x | 19–48x (5y) | 26x |
| FCF yield | 4.8% | 2.1–5.2% | 3.8% |
Scenario values are per share and rounded. A reverse DCF at $180 implies roughly 8% annual growth for five years, below what retention alone would suggest.
Risks
- AI-native competitors lower the price customers are willing to pay per seat.
- Retention is company-defined; a change in definition could flatter the trend.
- Stock-based compensation dilutes holders faster than buybacks offset it.
What would prove me wrong
- Net revenue retention falls below 108% for two consecutive quarters.
- Free cash flow margin stops expanding while growth slows.
- Large customers start reducing seats at renewal.
Position sizing
Started at about a quarter of the portfolio: high conviction in the business, but the valuation depends on one metric (retention), so not larger. Trim if it grows past 30%.
Still to check
- Haven't reconciled company-defined retention with the revenue bridge in the notes.
- Peer multiples come from one snapshot; need a second date.
Sources
- Example Software Co. FY25 annual report (fictional document) · Example Software Co., 2025-12
- Q4 FY25 earnings call transcript (fictional document) · Example Software Co., 2025-12
- Peer multiples snapshot (fictional data) · Demo data, 2026-01-05
Thesis history
- 5 January 2026Original thesis
Published. The text above is the original and is not edited.
- 20 February 2026Strengthened
Q1 retention held at 114% and usage add-ons grew faster than seats.
The one metric the thesis depends on held up. (Illustrative update.)
- 10 April 2026No change
Investor day added detail but no new information on retention.
Nothing that moves the case either way, noted so the timeline shows quiet periods too. (Illustrative update.)
- 12 May 2026Weakenedt0009
Trimmed after a strong run; a large customer cut seats at renewal.
The position passed the 30% sizing limit, so about a third was sold. Separately, one large customer reduced seats: the first sign of a risk listed in the thesis. One data point, not yet a trend. (Illustrative update.)
Transactions
| Date | Action | Holding | Shares | Price | FX | GBP | Fees | Reason |
|---|---|---|---|---|---|---|---|---|
| SELL · 12 May 2026 · t0009 | SELL | XSWExample Software Co. | 0.6 | $214.00 | 0.7900 | £101.44 | £0.15 | Trim: the position had grown past my sizing limit after a strong run. |
| BUY · 5 Jan 2026 · t0001 | BUY | XSWExample Software Co. | 1.8056 | $180.00 | 0.8000 | £260.00 | £0.39 | Opening position: recurring revenue at a price that assumes growth stalls. |