Long APIs, Short Slides

A pair trade for the AI transition The market is selling “software” as a monolith. Within that monolith there are tollbooth operators and road workers. AI replaces road workers. It pays tolls. I am by no means what you would call a “technical” trader. At the same time, I think if you are investing in an asset without looking at the price history, you should have your ISDA taken away. A lot of people draw lines on charts as a way to try to predict the future. This is dumb. Over long periods of time, the price of assets is driven by buyers and sellers. Why did the price go down? More sellers than buyers. Why did it gap up? More buyers than sellers. The reason you look at the historical price of an asset is to develop a useful mental model for the psychology of those buyers and sellers. We are, after all, animals. The best markets to trade are the ones with lots of different kinds of buyers and sellers. Commodity markets have “natural” participants — people who make the stuff and people who eat it — and then financial players like me and you attempting some form of informed speculation. The alpha is in understanding how these different groups behave over long periods of time. Stocks are kind of weird in this framework. The only natural sellers of stocks are the companies themselves (issuance), and the only natural buyers — besides speculators — are companies trying to acquire each other and the issuers themselves when they do reverse issuance, aka buybacks. When I speak about an air pocket, part of what I refer to isn't just the idea that financial buyers will get tired of seeing capex well in advance of revenues. It's that the most direct mechanism for financing this investment behavior is fewer buybacks and more debt issuance. So that’s what we are seeing in the market today. Folks are ingesting the idea of fewer buybacks, more debt issuance, and the creative destruction of AI businesses where the victims (expensive software companies) are more easily identifiable than the beneficiaries (newcos) — or at least the beneficiaries you can invest in. This is what it looks like for a market to internalize the fact that the singularity is here, it’s real, but it is anything but uniformly distributed. Over the next weeks and months, we expect this trend to continue as investors do the pencil-to-paper work of figuring out how much capex these guys can really deploy, how much that will cost in terms of fewer buybacks and more debt issuance, and who the medium-term winners and losers will be through this process. Our take is that, when combined with the likely reduction in weight from European investors still stinging from Trump tweaking their noses, we’ll see broader lower stock multiples across the board, with outperformance by the players that actually are positioned for the next decade and not caught flat-footed. Which brings me to what’s happening in software. The Setup Software stocks just got obliterated. IGV — the iShares Expanded Tech-Software ETF, the closest thing to a one-click bet on the software sector — is down 30% from its September highs. $118 to $82. The narrative writes itself. DeepSeek ships a frontier model for $6 million. Anthropic launches Cowork, a suite of AI agents that do legal review, sales ops, and compliance workflows autonomously. Cursor and GitHub Copilot are writing production code. The conclusion the market is drawing: AI writes software now, therefore software companies die. That conclusion is wrong. Or more precisely, it’s aimed at the wrong target. The Category Error There are two types of software companies in the world, and the market is treating them as one. Type 1: Software humans click on. Dashboards. CRMs. Project management tools. Anything with a user interface that a person stares at for eight hours a day. Salesforce, HubSpot, ServiceNow, Monday.com. These products exist because a human needs a visual interface to do a task. Type 2: Software bots call. APIs. Databases. Event streams. Monitoring. Authentication. Infrastructure layer. No human UI required. Consumed per call, per query, per event. Cloudflare, MongoDB, Datadog, Twilio, Snowflake. The first category is threatened. If an AI agent does the work, you don’t need a seat license for the human who used to do it. One less customer service rep means one less Zendesk seat. One less project manager means one less Monday.com seat. Seat-based SaaS compresses as headcount compresses. The market is right to sell these. The second category gets more usage when AI proliferates. Every AI agent that replaces a human still needs to authenticate (Okta), query a database (MongoDB, Snowflake), send a notification (Twilio), log its actions (Datadog), stream events (Confluent), search documents (Elastic), and get protected from cyberattacks (CrowdStrike). Here’s the key difference: one human doing a task generates one session, a few clicks, maybe a dozen API calls per hour. One AI agent doing the same task generates hundreds of A